1、GLOBAL PRIVATE EQUITY REPORT 2024Net Promoter,NPS,NPS Prism,and the NPS-related emoticons are registered trademarks of Bain&Company,Inc.,NICE Systems,Inc.,and Fred Reichheld.Net Promoter ScoreSM and Net Promoter SystemSM are service marks of Bain&Company,Inc.,NICE Systems,Inc.,and Fred Reichheld.Cop

2、yright 2024 Bain&Company,Inc.All rights reserved.About Bain&Companys Private Equity businessBain&Company is the leading consulting partner to the private equity(PE)industry and its stakeholders.PE consulting at Bain has grown eightfold over the past 15 years and now represents about one-third of the

3、 firms global business.We maintain a global network of more than 2,000 experienced professionals serving PE clients.Our practice is more than triple the size of the next-largest consulting company serving PE firms.Bains work with PE firms spans fund types,including buyout,infrastructure,real estate,

4、and debt.We also work with hedge funds,as well as many of the most prominent institutional investors,including sovereign wealth funds,pension funds,endowments,and family investment offices.We support our clients across a broad range of objectives:Deal generation.We work alongside investors to develo

5、p the right investment thesis and enhance deal flow by profiling industries,screening targets,and devising a plan to approach targets.Due diligence.We help support better deal decisions by performing integrated due diligence,assessing revenue growth and cost-reduction opportunities to determine a ta

6、rgets full potential,and providing a post-acquisition agenda.Immediate post-acquisition.After an acquisition,we support the pursuit of rapid returns by developing strategic blueprints for acquired companies,leading workshops that align management with strategic priorities,and directing focused initi

7、atives.Ongoing value addition.During the ownership phase,we help increase the value of portfolio companies by supporting revenue enhancement and cost-reduction initiatives and refreshing their value-creation plans.Exit.We help ensure that investors maximize returns by preparing for exit,identifying

8、the optimal exit strategy,preparing the selling documents,and prequalifying buyers.Firm strategy and operations.We help PE firms develop distinctive ways to achieve continued excellence by devising differentiated strategies,maximizing investment capabilities,developing sector specialization and inte

9、lligence,enhancing fund-raising,improving organizational design and decision making,and enlisting top talent.Institutional investor strategy.We help institutional investors develop best-in-class investment programs across asset classes,including private equity,infrastructure,and real estate.Topics w

10、e address cover asset class allocation,portfolio construction and manager selection,governance and risk management,and organizational design and decision making.We also help institutional investors expand their participation in private equity,including through coinvestment and direct investing oppor

11、tunities.Bain&Company,Inc.131 Dartmouth Street Boston,Massachusetts 02116 USA Tel:+1 617 572 2000 1Global Private Equity Report 2024ContentsThe Dark before the Dawn.2Private Equity Outlook 2024:The Liquidity Imperative.3Investments.9Exits .15Fund-raising .19Returns .24Move-In Ready:Renovating Your G

12、rowth Strategy.28 Have Secondaries Reached a Tipping Point?.35Building a Stronger Buy-and-Build .39Harnessing Generative AI in Private Equity .45The Year Cash Became King Again in Private Equity.522Global Private Equity Report 2024The Dark before the DawnDear Colleague:The year 2023 was one of porte

13、nt.Deal value fell by 37%.Exit value slid even more,by 44%.Fund-raising dropped across private capital,as 38%fewer buyout funds closed.Interestingly,dollar commitments in buyouts surged as a number of high-performing funds came to market.But it was truly a year of haves and have-nots.Just 20 funds a

14、ccounted for more than half of all buyout capital raised.The word for this market is stalled.Cutting through all of the macro noise was the 525-basis-point increase in US central bank rates from March 2022 to July 2023.The speed and magnitude of this rise caused general partners to hit the pause but

15、ton.The good news?Interest rates appear to be stable and have been for a few months.Record dry powder is stacked and ready for deployment.A sizable chunk of this dry powder is aging and needs to be put to work.Looking into portfolios,nearly half of all global buyout companies have been held for at l

16、east four years.In short,the conditions appear to be shifting in favor of hitting the go button.We will see what 2024 brings.Best wishes,Hugh MacArthur Chairman,Global Private Equity3 3Private Equity Outlook 2024:The Liquidity ImperativeAt a Glance Private equity continued to reel in 2023 as rapidly

17、 rising interest rates led to sharp declines in dealmaking,exits,and fund-raising.The exit conundrum has emerged as the most pressing problem,as LPs starved for distributions pull back new allocations from all but the largest,most reliable funds.The long-term outlook remains sound,but breaking the l

18、ogjam will require more robust approaches to value creation and rapid innovation in liquidity solutions.Its safe to say the private equity industry has never seen anything quite like whats happened over the last 24 months.While the sharp drop-off in deal activity in late 2022 and into 2023 echoes th

19、e period following the 200809 global financial crisis(GFC),the situation the industry faces today is largely unprecedented.The numbers are all very GFC-like:Deal value and deal count have fallen 60%and 35%,respectively,from their peaks in 2021.Exit value is down 66%,and the number of funds closing i

20、s off by nearly 55%Spiking interest rates derailed dealmaking in 2023 and left the capital flywheel sputtering.Getting unstuck is job one in the year ahead.By Hugh MacArthur,Rebecca Burack,Graham Rose,Christophe De Vusser,Kiki Yang,and Sebastien Lamy4Global Private Equity Report 2024(see Figure 1).Y

21、et whats driving these declines couldnt be more dissimilar to what was happening in 200809,and making sense of it requires a different lens altogether.As difficult as it was,the aftermath of the GFC followed a predictable pattern:To cope with the crisis,central bankers slashed interest rates to spur

22、 activity,the economy slowly stabilized,and private equity was able to claw its way back from what many predicted would be its unraveling.The resulting period of growth in the years that followed created a private equity industry that is vastly larger and more complex than anyone in 2008 could have

23、reasonably expected.Yet today that size and complexity magnify the challenges the industry faces.Business conditions are more perplexing than predictable.Interest rates have risen faster than at any time since the 1980s,and it remains unclear when the US Federal Reserve will reverse course or where

24、rates will eventually settle(see Figure 2).Concerns about what we dubbed last year“the most anticipated recession in history that hasnt happened yet”continue to linger.Yet to the surprise of most analysts,the economy is chugging along nicely.Record-low unemployment,reasonable growth,and surging publ

25、ic markets in the US suggest the possibility that we might just escape these months of turmoil with nothing worse than a soft landing.These crossed signals have left private equity hamstrung.The sheer velocity of the interest rate shock was something few in the industry had ever experienced,and the

26、impact on value has driven a wedge between buyers and sellers.Figure 1a:Investments,exits,and the number of buyout funds closed all continued to slide in 2023 as the industry reeled from rising interest ratesNotes:Investmentsexcludes add-ons;excludes loan-to-own transactions and acquisitions of bank

27、rupt assets;based on announcement date;includesannounced deals that are completed or pending,with data subject to change;Exitsincludes full and partial exits;bankruptcies excluded;IPO valuerepresents offer amount and not market value of company;Fund-raisingdata grouped by the year in which funds hel

28、d their final close;count is of allfunds,including those for which final close data is unavailable;buyout category includes buyout,balanced,coinvestment,and coinvestmentmultimanager funds;excludes SoftBank Vision FundSources:Dealogic;PreqinInvestmentsExitsFund-raisingGlobal buyout capital raised0200

29、400$600B02004006008001,000201320182023Count of funds closedGlobal buyout deal value02505007501,000$1,250B01,0002,0003,0004,000201320182023Deal countGlobal buyout-backed exit value 02505007501,000$1,250B01,0002,0003,000201320182023(66%)(1%)(60%)Exit count5Global Private Equity Report 2024Figure 1b:Ac

30、tivity during the second half of the year was an improvement on the first,but not by muchNotes:Investmentsexcludes add-ons;excludes loan-to-own transactions and acquisitions of bankrupt assets;based on announcement date;includesannounced deals that are completed or pending,with data subject to chang

31、e;Exitsincludes full and partial exits;bankruptcies excluded;IPO valuerepresents offer amount and not market value of company;Fund-raisingdata grouped by the year in which funds held their final close;count is of allfunds,including those for which final close data is unavailable;buyout category incl

32、udes buyout,balanced,coinvestment,and coinvestmentmultimanager funds;excludes SoftBank Vision FundSources:Dealogic;PreqinInvestmentsExitsFund-raisingGlobal buyout capital raised,quarterly Global buyout deal value,quarterly Global buyout-backed exit value,quarterly Deal countExit countCount of funds

33、closed0500300$350B02004006000500300$350B02004006008001,000050100150$200B002020 2021 2022 20232020 2021 2022 20232020 2021 2022 2023Figure 2:The 525-basis-point rise in interest rates from March 2022 to July 2023 was the sharpest monetary tightening in decades Notes:U

34、S shows federal funds rate;Europe shows euro short-term repo rate;UK shows clearing banks base rate(middle rate);basis point changes overa six-month period are displayed for the US only and calculated based on the increase in average interest rates between the end of June and Decemberof each year So

35、urce:LSEGCentral bank interest rates by region(monthly average)0246%Jan2020Jul2020Jan2021Jul2021Jan2022Jul2022Jan2023Jul2023EuropeUSUK+113 basispointsin US+289 bps+98 bps+25 bps6Global Private Equity Report 2024Price multiples,which tend to move inversely to interest rates,have tipped downward over

36、the last year,but only slightly so far.Thats because sellers are bringing to market only the highest-quality assets,those they are confident will move at a reasonable return.Otherwise,the exit channels have largely dried up,leaving general partners(GPs)with a towering$3.2 trillion in unsold assets a

37、nd stanching the flow of capital back to limited partners(LPs).These declines in activity have had a chilling effect on fund-raising.Slower distributions have left LPs cash flow negative,crimping their ability to plow more capital back into private equity.The industry still raised an impressive$1.2

38、trillion in fresh capital in 2023,and the buyout category attracted$448 billion.But LPs were highly selective.While capital flowed to the largest“reliable hand”buyout funds,fund-raising for most was as hard as its ever been.Slower distributions have left LPs cash flow negative,crimping their ability

39、 to plow more capital back into private equity.Until GPs can begin moving assets out of their portfolios in a timely fashion,raising the next fund wont get any easier.And the threat to returns is real.Buyouts typically involve term loans that expire in five to seven years.Already,interest coverage r

40、atios among buyout-backed portfolio companies in the US have dropped to 2.4 times earnings before interest,taxes,depreciation,and amortization(EBITDA),the lowest level since 2007.That is pressuring GPs to both find liquidity solutions and devise new ways to generate profits through operating leverag

41、enot just the multiple expansion and revenue growth the industry has leaned on for years.Early signs of a turnaround?The most difficult aspect of this gridlock,of course,is predicting what will happen next.But in our view,the green shoots of a recovery are starting to poke through.Perhaps the most i

42、mportant is that,barring any new macro shocks or geopolitical crises,rates are more likely than not to moderate in the coming year.Even slight cuts are likely to spur on dealmaking as long as the macro outlook remains relatively stable.Buyout funds alone are sitting on a record$1.2 trillion in dry p

43、owder,and 26%of that is four years old or older,up from 22%in 2022(see Figure 3).That creates a heavier incentive than normal for GPs to get off the sidelines and start buying,even if conditions arent ideal.Activity is already ticking upward,and with help from the Fed and the European Central Bank,t

44、he bias in 2024 is likely to the upside when it comes to deal count and value.Exits are another matter.Barring a sharper-than-anticipated drop in rates,sellers will continue to face high hurdles to unloading companies to strategic buyers,other sponsors,or the public markets.7Global Private Equity Re

45、port 2024With sponsors struggling to send cash back to their LPs,2024 will likely be defined by how creative the industry can be in finding ways to generate liquidity.Action required.Whats clear is that passively waiting for conditions to recover is not a viable strategy.Much of this report is devot

46、ed to exploring how these dynamics are playing out and what the most forward-thinking GPs are working on.Getting unstuck will demand action in several directions at once:Doubling down on value creation.The exit situation is shining a bright light on how critical it is to generate operating leverage

47、in a market where tailwinds from multiple expansion have turned into headwinds.You cant control the direction of rates.But you can get better at underwriting value and capturing it through crisp execution.Weve talked about it for years:The industry has relied disproportionately on rising multiples a

48、nd revenue gains to generate returns while margin improvement has contributed practically nothing.That no longer works when rising rates serve as ballast for asset multiples.The portfolio companies that will stand out in this difficult market are those that have used every means possible to boost EB

49、ITDA efficiently and can demonstrate to the next owner that theres money left on the table.That means funds have to get sharper at finding and pulling the value-creation“levers”that generate organic growthpricing,salesforce effectiveness,and Figure 3:With a record 26%of global buyout dry powder now

50、four years old or older,general partners are under growing pressure to do dealsNotes:Buyout category includes buyout,balanced,coinvestment,and coinvestment multimanager funds;assumes average investment period of fiveyears;percentage split of capital raised in 2023 is as of Q2;discrepancies in bar he

51、ights displaying the same value are due to rounding differencesSources:Preqin;Bain analysisGlobal buyout dry powder,by years since capital raised($T)2017$0.7T19180.719190.818201.019210.923221.022231.226Share of capitalthat is at least4 years old(%)More than 5 years45 years3 years or less8Global Priv

52、ate Equity Report 2024product innovation,to name a few.If these insights werent part of the original value-creation plan,now is the time to focus on them.The market has been abundantly clear on this.The companies that are selling are not those that have merely gotten bigger and/or leaner.The premium

53、 is on generating strong,profitable,organic growth.Managing across the portfolio.While strategies focused on EBITDA growth take time,a ballooning exit backlog also presents more immediate concerns.Funds need to develop a clear-eyed,pragmatic appraisal of where each portfolio company sits in terms of

54、 its return profile,its capital structure,and its future prospects.As long as rates stay elevated,GPs have choices to make:Which companies will reap an acceptable return if we sell now?Which should we sell anyway so we can return cash to LPs?Which companies face loan expirations,and where can we eff

55、ectively“amend and extend”to reshape a balance sheet without too much pain?What are our options for generating liquidity through the burgeoning secondary market?If the industrys growing inventory of unsold assets isnt going to be a problem,there are a few things you have to believe.First,with a larg

56、e volume of portfolio companies facing refinancing hurdles,it will be critical that debt holders take the stance they did in 200809.Lenders clearly didnt want the keys to a bunch of troubled portfolio companies then and probably dont want them now.That leaves open the opportunity to pay a penalty,ad

57、d some equity,and arrive at a workable capital structure.The second thing you need to believe is that there are enough innovative solutions like continuation funds,securitizations,and NAV financing to help GPs recap prized assets and wait for returns to ripen while keeping economic interest aligned

58、between GPs and LPs.The secondaries space is still small and somewhat controversial.But it is growing rapidly and represents the kind of financial innovation that is private equitys specialty.Professionalizing fund-raising.An effective portfolio scan should lead to a clear,practical roadmap for stee

59、ring the fund through an immensely difficult period.The next step is communicating to LPs how portfolio managers are using all the tools at their disposal to act as a trusted steward of investor capital.GPs arent particularly adept at this kind of communication because they havent had to be in the p

60、ast.Ad hoc,anecdotal conversations about a single portfolio company were sufficient when performance overall wasnt really in question.Now performance is everything,and the competition for a limited pool of capital has never been more fierce.This is spurring the most proactive funds to consider makin

61、g a step change in how they approach investors by professionalizing processes and honing their go-to-market capabilities.The firms out-raising others are strategically mapping out who their LPs should be and developing the capabilities and tools necessary to understand what it takes to win with them

62、 and expand share of wallet.They are building the kind of commercial organizations the best B2B sellers rely on daily.9Global Private Equity Report 2024None of this is easy,of course,but none of it is insurmountable.Private equity survived the overexuberance of the RJR Nabisco years.It lived through

63、 9/11 and the subsequent recession.It took the worst blows of the global financial crisis and came out even stronger.The industry,in other words,has consistently demonstrated its resilience.This is one of those moments.Time to get to work.Heres a more detailed look at what happened in 2023.Investmen

64、tsPrivate equity dealmakers tend to make the most of the cards theyre dealt.As long as they have reasonable confidence in whats coming,theyll find a way to make a good deal work.But confidence was the first casualty when the Fed jacked rates at the fastest pace since the 1980s,leaving the industry g

65、asping for air.The falloff that started in the second half of 2022 bled over into 2023.Excluding add-ons,buyout investment value dropped to$438 billion,a 37%decrease from 2022 and the worst total since 2016(see Figure 4).Overall deal count dropped 20%to around 2,500 transactions.The steep slope of t

66、he decline was something the industry hadnt experienced since the global financial crisis.The malaise infected regions across the world,with Europe and Asia-Pacific both experiencing significant declines(see Figure 5).Figure 4:The two-year falloff in global buyout deal value marks the steepest decli

67、ne since the global financial crisisNotes:Excludes add-ons;excludes loan-to-own transactions and acquisitions of bankrupt assets;based on announcement date;includes announceddeals that are completed or pending,with data subject to change;geography based on targets location;average deal size calculat

68、ed using deals withdisclosed value onlySource:DealogicGlobal buyout deal value,by region02004006008001,000$1,200B01,0002,0003,0004,000200529525697349635249954220519700211,0861,02922699807264940769447608438%46%8%2

69、2%31%38%32%47%Avg.dealsize($M)Deal count2023 vs.20222023 vs.5-yr.avg.NorthAmerica37%34%TotalEuropeAsia-PacificRest ofworldChange in deal value10Global Private Equity Report 2024Deals of all kinds felt the impact,but those that depended on bank financing suffered the most.As yields on large syndicate

70、d loans approached 11%in the US and 9%in Europe(both 10-year highs),banks retreated and issuance of new loans plunged(see Figure 6).The lack of affordable leverage cut the number of megadealsthose over$5 billionby almost half,and the average deal size dropped to$788 million,down from the peak of$1 b

71、illion in 2021.Buyouts broadly saw double-digit declines in deal count(see Figure 7).Technology deals,which by nature require less leverage than deals in other sectors,maintained their dominant share of total buyout count,but asset-heavy traditional industries like industrial goods and services expa

72、nded their share slightly,benefiting from a flight to safety among investors looking for stability wherever they could find it(see Figure 8).The growth and venture capital segments,meanwhile,continued to drift sideways.Both focus on riskier,earlier-stage companies whose growth-based valuations are p

73、articularly vulnerable to interest rate pressure.They were also buffeted by the lingering impact of the crypto collapse in 2022 and the implosion of Silicon Valley Bank in 2023(see Figure 9).Elevated interest rates contributed to several other important shifts in the financing environment.Private cr

74、edit continued to aggressively fill gaps left by the big banks and captured 84%of the middle Figure 5:Deal value and activity declined globallyNotes:North America and Europeexcludes add-ons;excludes loan-to-own transactions and acquisitions of bankrupt assets;based on announcementdate;includes annou

75、nced deals that are completed or pending,with data subject to change;geography based on targets location;Asia-Pacificincludesbuyout,growth,early-stage,private investment in public equity,and turnaround deals;excludes add-ons;excludes real estate;deal value excludes dealswith announced value less tha

76、n$10 million;includes investments that have closed and those at agreement-in-principle or definitive agreement stageSources:Dealogic;AVCJ;Bain analysisNorth AmericaEuropeAsia-PacificBuyout and growth deal value0200400$600B0200400$600B0200400$600B20122023Buyout deal value05001,0001,5002,00005001,0001

77、,5002,00002,0004,0006,00020122023Buyout deal value20122023Buyout countBuyout countBuyout and growth count11Global Private Equity Report 2024Figure 6:With yields on leveraged bank loans shooting through the roof,LBO loan issuance plunged in 2023,making it hard to finance transactionsFigure 7:Deals of

78、 all sizes declined in 2023 and were well off five-year averagesNotes:European institutional spread includes all tracked LBO deals,regardless of size;US large corporate defined as LBOs with more than$50 millionin EBITDA;Europe syndicated loan volume converted using euro/US dollar conversion rate of

79、1.076Sources:LCD;LSEGLeveraged buyout(LBO)yields0.02.04.06.08.010.012.0%2012 819202122 238.9%10.9%73$64B022311350(56%)Syndicated LBO loan issuance($B)US large corporateEuropeUSEuropean institutionalNotes:Includes deals with disclosed value only;

80、excludes add-ons;excludes loan-to-own transactions and acquisitions of bankrupt assets;based onannouncement date;includes announced deals that are completed or pending,with data subject to change;average deal size calculated using dealswith disclosed value onlySources:Dealogic;Bain analysisShare of

81、global buyout deal count,by deal size020406080100%200700211,02922801237882023 vs.2022 2023 vs.5-yr.avg.Avg.dealsize($M)36%Less than$0.1B 43%46%38%Total34%33%$0.1B$1B20%32%$1B$5B47%34%More than$5B12Global Private Equity Report 2024Figure 8:Technology remained the leader in deal count,but i

82、ndustrials increased share as investors looked for stability in a traditional sectorFigure 9:After soaring during the pandemic,growth and late-stage venture investing has come back to earthNotes:Excludes add-ons;excludes loan-to-own transactions and acquisitions of bankrupt assets;based on announcem

83、ent date;includes announceddeals that are completed or pending,with data subject to changeSource:DealogicShare of global buyout deal count,by sector 020406080100%2002Technologysshare oftotal(%)TechnologyIndustrialsServicesHealthcareFinancial servicesConsumer productsRetailUtili

84、ties and energyMedia and entertainmentTelecommunicationsReal estatePublic sectorTransportationNotes:Late-stage venture capital defined as financing by a VC firm in Series B through Series Z+rounds and/or more than five years after the companysfounding date;growth equity defined as a noncontrol,equit

85、y investment by a PE firm into a company,with cash received by the company Source:PitchBook Global growth capital invested,by investment stage,quarterly050100150200$250B942089382362632230111129100Growth equityLate-stage venture capitalEarly-stage venture capital20202

86、02Global Private Equity Report 2024marketdeals with a total loan package of less than$500 million(see Figure 10).At the same time,investors responded to the increased financing costs by using less debt and more equity overall.Debt multiples in 2023 dropped 17%from 2022 to 5.9 times EBITDA

87、,the lowest level since 2012 (see Figure 11).Thats not surprising given that interest coverage ratios in both the US and Europe were the worst theyve been in years(as well discuss more fully in the following section on exits).High interest rates,in and of themselves,make acquisitions harder to penci

88、l by raising the cost of capital.But theyve also complicated dealmaking over the past year by promising to put downward pressure on price multiples(even if prices remain relatively high historically).This is essentially a math issue:When rates go down,multiples of cash flow go up,and vice versa.Beca

89、use of that,rock-bottom rates for the past decade have provided a tailwind for deals by keeping price multiples growing.That made acquisitions pricey,but if buyers could count on selling an asset for more than they paid,the math still worked.Now the calculation is harder.Price multiples have,in fact

90、,declined slightly over the past year,but they still sit at almost 11 times EBITDA in the US and around 10 times in Europe as sellers seek to unload the strong assets theyre confident will sell(see Figure 12).That makes the average target company expensive on a historical basis,yet its hard to assum

91、e that multiples will do anything but continue to ease off until interest rates begin to moderate.Figure 10:With banks pulling back,private lenders continued to expand their share of financing middle-market dealsNotes:Middle market includes issuers with revenues less than$500 million and total loan

92、package less than$500 million;direct lending includesnonsyndicated facilities,including club lendingSource:LSEG LPCShare of US middle-market LBO loan issuance,by debt type100%201464%36%1549%51%1644%56%1751%49%1837%63%1942%58%2034%66%2125%75%2220%80%As ofQ3 2316%84%Syndicated debtDirect lending14Glob

93、al Private Equity Report 2024Figure 11:Debt multiples fell to a 10-year low as rising interest rates made it harder to pile on leverageSource:LSEG LPCUS large corporate debt to EBITDA ratio for LBO loans20077.1x085.5094.8105.7115.6125.9136.2146.6156.0166.1176.4186.5196.7206.9217.0227.1235.9(17%)Figu

94、re 12:Purchase price multiples softened slightly in response to rising interest rates,but not enough to counterbalance the increased cost of capitalSource:LCD Average EBITDA purchase price multiple for LBO transactions0.05.010.015.0 x20000204060802322EuropeUS10.1x10.8x15Global Private Equ

95、ity Report 2024The good news,as we said earlier,is that some moderation is likely on its way in 2024 as inflation stabilizes and central bankers try their best to bring the global economy to a soft landing.Barring further shocks,a more stableeven favorableoutlook will help GPs get more comfortable w

96、ith what they are underwriting.The level and age of the dry powder in their funds is also creating a heavy incentive to get moving.The industry is sitting on an unprecedented$3.9 trillion in unspent capital,the largest share of it($1.2 trillion)in buyout funds(see Figure 13).The slowdown in dealmaki

97、ng has also increased the average age of that buyout capital;around 26%of it is four-plus years old and aching to be deployed.The potential for easing rates and the need to put money to work are why we believe investments may improve incrementally in 2024(unless,of course,the macro environment takes

98、 a turn for the worse).But its equally likely that rates arent going back to zero any time soon,meaning pressure on multiples will endure.ExitsExit activity fared even worse than dealmaking in 2023,as rising interest rates and macro uncertainty left buyers and sellers at odds over valuations.Buyout-

99、backed exits came in at$345 billion globally,a 44%decline from 2022.The total number of exit transactions fell by 24%to 1,067(see Figure 14).Activity was slack across all geographies.Figure 13:Global dry powder across private asset classes has been stacking up for almost a decade and set another rec

100、ord in 2023Notes:Buyout category includes buyout,balanced,coinvestment,and coinvestment multimanager funds;other category includes fund-of-funds,mezzanine,and hybrid;discrepancies in bar heights displaying the same value are due to rounding differencesSource:PreqinGlobal private capital dry powder,b

101、y fund type2023 vs.2022 91.242101.140111.137121.135131.434141.435151.536161.735172.037182.336192.536203.033213.230223.530233.931060.945071.143081.243Buyouts shareof total(%)20050.644 BuyoutTotalVenture capitalReal estateInfrastructureGrowthDirect lendingDistressed PESecondaries16%12%9%15%5%5%15%0%9%

102、65%2023 vs.5-yr.avg.28%35%69%3%28%39%42%17%39%62%Other0.01.02.03.0$4.0T16Global Private Equity Report 2024While corporate buyers remained the largest channelaccounting for nearly 80%of total exit value in 2023the value of these strategic deals fell off 45%from 2022,to$271 billion.This was part of a

103、broad corporate mergers and acquisitions pullback in 2023 as harried executives tried to make sense of rising rates and the uncertain macro environment.Bain&Company research shows that corporate buyers may begin to get more active if rates stabilize and the economic outlook improves.But company exec

104、utives also indicate that they plan to be significantly more selective about the assets they purchase,focusing on scale deals to accomplish consolidation objectives before returning to scope-oriented capability investing to drive growth.That suggests any recovery in strategic exits will be tentative

105、.The sponsor-to-sponsor channel(deals between private equity firms)was similarly challenged in 2023.The value of these transactions dropped to$62 billion,a 47%decline from 2022s total.Higher rates meant that a potential buyer of a given portfolio company faced the prospect of spending more to borrow

106、 less as a multiple of EBITDA than the seller did when it bought the company.That left buyers and sellers facing different economics for the same asset,resulting in an unbridgeable spread between bid and ask.Amid surprisingly strong public equity markets in 2023,the IPO exit channel showed some sign

107、s of life,rising to$11.8 billion from$6.9 billion in 2022.But it still made up just 3%of total exit volume Figure 14:Buyout-backed exits sank to their lowest level in a decade as the industrys two biggest exit channels contractedNotes:Includes partial and full exits;bankruptcies excluded;IPO value r

108、epresents offer amount and not market value of companySource:DealogicGlobal buyout-backed exit value,by channel0250500750$1,000B01,0002,00020052508332826367952220490211,0222261323345Sponsor to sponsorSponsorto strategicIPO59%32%80%44%Total47%45%

109、44%72%2023 vs.2022 Change in exit value2023 vs.5-yr.avg.Exit count17Global Private Equity Report 2024and is unlikely in the coming months to provide consequential relief for an industry struggling to generate higher distributed to paid-in capital(DPI).Indeed,unless rates drop meaningfully in 2024,no

110、ne of these exit channels is likely to rebound vigorously in the short term,and the deals that do close will skew toward large companies and those with the strongest fundamentals.Buyout funds,meanwhile,will be challenged to make a meaningful dent in the$3.2 trillion in unexited assets sitting in the

111、ir portfolios(see Figure 15).This will focus GPs on two overarching objectives.First,they will need to boost DPI in the near term by determining which assets they can sell(both old portfolio companies and newer ones)and aggressively chasing those opportunities.Second,they will need to manage the bal

112、ance sheets of the companies they hold and develop strategies to increase EBITDA.Over the past two years of inflation followed by monetary tightening,interest coverage ratios among buyout-backed companies have dropped sharply to 2.4 times cash flow in the US and 2.6 times in Europe(see Figure 16).Th

113、ose are the lowest levels since 2008 and suggest that,for the average buyout-backed portfolio company,paying off interest has already gotten significantly harder.In 2023,according to Dealogic,$95 billion in leveraged loans came due and presumably had to be refinanced at higher rates.And by year-end

114、2025,loans worth more than three times that amount(approximately$300 billion)will mature,making life difficult for GPs who have yet to exit them(see Figure 17).Figure 15:The record-high number of aging unexited companies in buyout portfolios has stanched the flow of capital back to investorsNotes:Sh

115、ows data through FY 2023 for global active buyout-backed companies and average holding period and data through Q2 2023 for unrealizedvalue;excludes add-ons;buyout category includes buyout,balanced,coinvestment,and coinvestment multimanager fundsSources:PitchBook;Preqin Global active buyout-backed co

116、mpanies0102030K0123$4T20003.14013.54023.95033.85044.16054.27063.89073.711083.512093.613104.313114.614125.215135.716146.017155.918165.419175.520185.321195.422205.324215.325225.927236.128Global buyout unrealized valueMedian holdingperiod for buyout-backed exits(years)18Global Private Equity Report 202

117、4Figure 16:Interest coverage ratios declined in 2023,given the higher cost of debt and inflationary margin pressureFigure 17:Close to$300 billion in leveraged loans is coming due by the end of 2025,dialing up the pressure to generate EBITDANote:Includes all LBOs from large corporate(more than$50 mil

118、lion in EBITDA)to middle market(less than$50 million in EBITDA)Source:LCDLBO interest coverage ratio for US portfolio companies(EBITDA/cash interest)20203.4213.5222.9232.4020406080100%AverageLess than 3x3x5xGreater than 5xSource:DealogicLBO loan value,by upcoming maturity dates($B)2023$95B2412625172

119、261729$298B1063035North AmericaEurope19Global Private Equity Report 2024Because boosting EBITDA is the most potent bug spray against higher interest expense and the best foundation for a stronger exit story over time,the most proactive GPs are doubling down on value creation as they wait

120、for the exit channels to improve.But what if refinancing needs outpace the firms ability to generate stronger cash flow?During the GFC,many GPs bought back debt in their portfolio companies that was trading at a deep discount amid the economic malaise.The bet was that those companies would outlast t

121、he recession and the debt would eventually bounce back,actually enhancing the overall return.With rates high and recession at bay,thats not an option today.But GPs are actively exploring other solutions.A few examples:For those with undrawn equity capacity,one alternative is to inject enough new equ

122、ity into a company to make debt affordable,avoid diluting returns,and maintain 100%controlessentially kicking the can down the road for the price of the equity infusion.Another strategy is to use NAV loans to borrow against the portfolionot individual companiesto effectively cross-collateralize asse

123、ts.Thats using strength to mitigate exposure,but it does lock in a potential drag on the entire fund.Other funds are creating new securities out of single assets in need of refinancing through innovative continuation vehicles that take out debt and reset the cap table.LPs can roll their positions or

124、 not,and the GP retains economics in the new structure.Weathering this period of exit stress will clearly depend on innovation.GPs need to sell what they can and buy time to hold good assets while maintaining aligned incentives with LPs and management teams.Fund-raisingProbably the most generous way

125、 to think about 2023 fund-raising is that it contributed an impressive$1.2 trillion to the stunning$7.2 trillion in fresh capital the industry has accumulated since 2019 (see Figure 18).Whether you saw any benefit from that windfall,however,depended on where you sat.The amount raised in 2023 was act

126、ually the least the industry has pulled in annually since 2018down 20%from 2022 totals and almost 30%off the all-time high in 2021.The decline reflects the cash flow constraints LPs are facing due to the exit slowdown and accelerated drawdowns in recent fund-raising vintages(more on this below).Buyo

127、ut funds,which raised 18%more capital year over year,were the only major category to post gains as LPs focused allocations on the funds they trust most.The exception was secondaries,which roared ahead by 92%(off a smaller base)as investors spotted opportunity in a category of funds aimed 20Global Pr

128、ivate Equity Report 2024at solving the industrys liquidity woes.Other than that,however,funds struggled.The darlings in the run-up to 2021growth,venture capital,and infrastructure fundsall declined sharply.Even within buyout,there were distinct winners and losers as LPs gravitated to size and percei

129、ved quality(see Figure 19).Allocations clearly favored large funds,with the top 20 funds raising a disproportionate 51%of capital aimed at buyout.But girth wasnt all that mattered;the premium was on performance and balance.Several lagging megafunds had to cut targets,and LPs pulled back a bit from t

130、heir decade-long affinity for technology.Diversified funds like CVC Capital Partners ($29 billion)and Clayton,Dubilier&Rice($26 billion)dominated the top 20.Investors preference for large funds obscured a sharp decline in overall fund-raising success during the year.While the average size of a buyou

131、t fund closed in 2023 was$1.2 billionan 83%increase from 2022 and by far an industry recordthe number of funds closed(449)declined 38%year over year(see Figure 20).Competition for capital has never been more intense.Private capitals breakneck growth over the past decade has led to a highly diverse i

132、ndustry with$14.5 trillion in assets under management(see Figure 21).Yet its become clear in recent years that there isnt enough capital to go around.As of January 2024,approximately 14,500 funds across the industry were on the road seeking$3.2 trillion in capital,and Figure 18:Private fund-raising

133、contracted in 2023 with the notable exceptions of buyout funds and secondariesNotes:Includes closed-end and commingled funds only;buyout category includes buyout,balanced,coinvestment,and coinvestment multimanagerfunds;data includes funds with final close and represents the year in which they held t

134、heir final close;other category includes fund-of-funds andmezzanine;excludes natural resources;excludes SoftBank Vision Fund Source:PreqinGlobal private capital raised,by fund typeClose year040.2050.4060.5070.7080.7090.3100.3110.4120.4130.6140.7150.8161.1171.2181.1191.4201.4211.7221.5231.22023 vs.20

135、22 2023 vs.5-yr.avg.BuyoutTotalReal estateGrowthVenturecapitalDirect lendingSecondariesInfrastructureDistressed PE18%20%31%30%56%23%92%56%14%25%15%15%29%14%54%5%58%43%15%28%Other$1.5T1.00.50.020030.121Global Private Equity Report 2024Figure 19:Buyout limited partners focused most of their attention

136、on the sectors largest,most experienced fundsNotes:Includes closed-end and commingled funds only;buyout category includes buyout,balanced,coinvestment,and coinvestment multimanagerfunds;data includes funds with final close and represents the year in which they held their final close;excludes SoftBan

137、k Vision FundSource:PreqinGlobal buyout capital raised,by fund sizeClose year200347272606433582572036654232237956234486605307269550826958091110526Share of$3B+funds(%)00 15%TotalLess than$0.5B34%29%8%$0.5B$3B2%37%

138、$3B$5B80%43%More than$5B 32%18%2023 vs.2022 2023 vs.5-yr.avg.$500BFigure 20:While far fewer buyout funds closed in 2023,the ones that did skewed larger,driving average fund size to its highest level in a decadeNotes:Includes closed-end and commingled funds only;count of buyout funds closed includes

139、all buyout funds closed,including those for which thevalue of final funds raised is not available;average size of closed buyout funds is total funds raised across all buyout funds for which the value of finalfunds raised is available,divided by the total number of buyout funds for which only the val

140、ue of funds raised is known;buyout category includes buyout,balanced,coinvestment,and coinvestment multimanager funds;excludes SoftBank Vision FundSources:Preqin;Bain analysisCount of buyout funds closed globally Close year2054508578449(38%)Close year2013$

141、809M665998002064821,234(+83%)Average size of buyout funds closed globally($M)22Global Private Equity Report 2024only$1 closed for every$2.40 targeted,marking the worst supply/demand imbalance in more than a decade(see Figure 22).Surveys suggest that LPs remain commit

142、ted to private equity,both short term and long term (see Figure 23).But as a practical matter,increasing allocations will come down to cash flows.LPs have been cash flow negative for four out of the last five years,as unexited assets began to pile up and DPI lagged(see Figure 24).Its also true that

143、the pace of drawdowns from recent fund vintages has been rapid by historical standards,largely because of the postCovid-19 boom in dealmaking.On a normalized basis (accounting for the difference in industry size),drawdowns from 202021 buyout fund vintages are tracking the 2006 vintage,which had the

144、steepest pace of outflows in the industrys history and an abnormally slow payback period amid the post-GFC recession.As we explore later in this report,there are reasons to believe the 202021 vintages will eventually break with this pattern.But the concern among LPs is that,because this capital was

145、invested at peak price multiples right before rates took off,it may be trapped for longer than is typical.Getting exit markets unstuck will likely take two things:meaningful easing by the Fed in the year ahead and efforts to justify those high multiples through the hard work of creating new value at

146、 portfolio companies.Figure 21:After a year like 2023,its easy to forget that private capital has grown in stunning fashion over the past decade Notes:Buyout category includes buyout,balanced,coinvestment,and coinvestment multimanager funds;secondaries includes real estate secondaries,infrastructure

147、 secondaries,direct secondaries(PE),and secondaries(PE)fund types;other category includes fund-of-funds,mezzanine,natural resources,hybrid,private investment in public equity,and real assets;excludes distressed private equity Source:Preqin Global AUM,by asset type20134.0144.1154.4164.7175.4186.3197.

148、4209.22111.52213.1As ofQ2 2314.52013Q2 23CAGR12%Buyout14%Total23%Venturecapital10%Other10%Real estate19%Growth16%Secondaries18%Infrastructure25%Direct lending$15T 105023Global Private Equity Report 2024Figure 22:But competition for new capital has never been so intense,creating the worst supply/dema

149、nd mismatch in more than a decadeNotes:Buyout category includes buyout,balanced,coinvestment,and coinvestment multimanager funds;includes closed-end and commingled fundsonly;other category includes fund-of-funds and mezzanine;excludes natural resourcesSources:Preqin;Bain analysis Share of global pri

150、vate capital funds on the road,by type of fundValue of private capital funds on the road duringthe year,divided by value of funds closed that yearValue of buyout funds on the road/buyout capital raised020406080100%Count of funds14.5KBuyoutReal estateInfrastructureVentureGrowthDirect lendingOtherSeco

151、ndariesDistressed PE0123x2011 73Aggregatecapital targeted$3.2TFigure 23:Despite the challenging market environment,limited partners remain largely bullish on private equitySource:Preqin investor survey(201623)Q:In the next 12 months,do you expect to investmore,less,or the same

152、amount of capital in private equity than the last 12 months?Q:In the longer term,do you expect to increase,decrease,or maintain your allocations toprivate equity?020406080100%2012223LesscapitalSame amountof capitalMorecapital020406080100%2012223DecreaseallocationMaintainallocat

153、ionIncreaseallocation24Global Private Equity Report 2024ReturnsFor LPs,of course,private equitys enduring appeal boils down to steady long-term returns and diversification.In 2023,the industry continued to shine on all counts.The 10-year horizon internal rate of return(IRR)for buyout funds in both t

154、he US and Western Europe has trended downward slightly since 2021.But the industry still beat public-market proxies over that period and handily outperforms the more volatile public sector for time periods greater than a year(see Figures 25 and 26).And with the so-called Magnificent Seven technology

155、 stocks now accounting for 28%of the S&P 500 Index and driving its performance,private equity funds are also playing an increasingly vital role in helping LPs maintain diversification in their portfolios.In a period of sustained high(or at least higher)interest rates,however,maintaining performance

156、will likely call on GPs to raise their game when it comes to value creation.Buyout funds on average have essentially ignored margin growth as a driver of value over the last decade and have been carried along by multiple expansion(see Figure 27).Top-quartile deals,however,tend to have a different mi

157、x.While these industry stars have also leaned on multiple expansion for half the upward movement in the enterprise value of their portfolio companies,margin improvement plays a significantly larger role than it does for the average fund(see Figure 28).Figure 24:But with more capital going out than c

158、oming back in,negative cash flows for limited partners are crimping new allocationsNote:2023 represents aggregation of distributions,contributions,and net cash flow from Q1 to Q3 2023Sources:MSCI;Bain analysisGlobal buyout fund capital contributions and distributions 4002000200$400B20051.2141.8151.9

159、161.5171.3181.2190.9200.9211.1220.8As ofQ3 23 0.7061.0070.8080.4090.4100.8111.1121.4132.1Ratio ofdistributions tocontributions ContributionsDistributionsNet cash flowsA sustained period of slower exits ledto multiple years of negative cashflows during the global financial crisis25Global Private Equi

160、ty Report 2024Figure 25:Buyout funds in the US and Western Europe have outperformed public markets despite slight declines in 2023Notes:ICM internal rate of return calculated using public market equivalents via the Long-Nickels index comparison method,an IRR-based methodologythat makes meaningful co

161、mparisons between private capital investments and indexes;assumes buying and selling the index according to the timing andsize of the cash flows between the investor and the private investment;Western Europe as defined by MSCI,includes 32 countries Source:MSCI10-year horizon IRR vs.public markets105

162、05101520%BuyoutS&P 500PME200003 05 07 091 Q323US buyout funds 05105101520%BuyoutMSCIEuropePME200003 05 07 091 Q323Western European buyout fundsFigure 26:And this outperformance persists over time horizons longer than a yearNotes:Data for US and Asia-Pacific calculated in US dol

163、lars;data for Europe calculated in euros;ICM internal rate of return calculated using public marketequivalents via the Long-Nickels index comparison method;Western Europe as defined by MSCI,includes 32 countriesSource:MSCIEnd-to-end pooled net IRR(as of Q3 2023)MSCI Europe PMEBuyout fundsMSCI Asia-P

164、acific PMEBuyout and growth fundsS&P 500 PMEBuyout funds 01020%151020Investment horizon(in years)US01020%151020Investment horizon(in years)Western Europe01020%151020Investment horizon(in years)Asia-Pacific26Global Private Equity Report 2024Figure 27:Sustained higher interest rates may take away the

165、steady multiple expansion that has fueled buyout returns for the past decadeNotes:Indexed to enterprise value at entry;includes fully and partially realized global buyout deals by year of entry;includes deals with invested equitycapital of$50 million or more;excludes real estate;all figures calculat

166、ed in US dollarsSources:DealEdge powered by CEPRES data;Bain analysisMedian indexed value-creation drivers for global buyouts(deal entry years 201323)Enterprise valueat entry100.0Revenuegrowth27.4Marginexpansion0.1Multipleexpansion24.0Enterprise valueat exit151.553%47%Figure 28:Margin expansion is p

167、art of what gives top-quartile deals their edgeNotes:Top-and bottom-quartile deals by internal rate of return;top and bottom quartiles include only deals with IRR data available;includes fully andpartially realized global buyout deals by year of entry;includes deals with invested equity capital of$5

168、0 million or more;excludes real estate;all figurescalculated in US dollarsSources:DealEdge powered by CEPRES data;Bain analysisMedian indexed value-creation drivers for global buyouts,by quartile performance(deal entry years 201323)252575125Top-quartile deals Revenue growth 35%Margin expansion 15%Mu

169、ltiple expansion 50%All deals53%47%Bottom-quartile deals27Global Private Equity Report 2024This suggests that,to drive the steady performance LPs increasingly demand,GPs will need value-creation strategies that increase operating leverage by boosting revenue and margins,not just revenue alone.This w

170、ill be especially critical as higher interest rates put the brakes on the multiple expansion that the industry took for granted in the era of 0%rates.Figuring out how to generate performance without those macro tailwinds is what will separate winners and losers in 2024 and beyond.2828Move-In Ready:R

171、enovating Your Growth StrategyAt a Glance With global exits at a 10-year low,its safe to say it has rarely been harder to sell a portfolio company.Thats challenging sellers to think harder and earlier about how to demonstrate the value theyve added during hold and whats left on the table for a new o

172、wner.For many,the time is now to refresh the value-creation plan(or develop a new one)and start showing early results to build credibility.It seemed promising enough when the sale process started.A successful midsize fund had put a profitable portfolio company up for auction,and a group of 10 to 12

173、bidders had quickly RSVPd to the management presentation.For a moment at least,it looked like all systems go.Then came the presentation itself.As the bankers worked through the exit story and management tried to answer one tough question after another,the potential bidders began to fidget and look a

174、t To sell in this challenging market,show buyers why the best is yet to come.By Brian Kmet,Lars Dingemann,and Allison Gans29Global Private Equity Report 2024their phones.Within days they had all disappeared,except for two or three bottom fishers hoping to capitalize on a broken process by snatching

175、the asset at a discount.While the firm was too disciplined to take the bait,the message was clear:The exit motions that had worked so reliably over the previous decade simply werent going to cut it in a market turned upside down by stubbornly high interest rates.Amid the most challenging environment

176、 for closing deals in a generation,some version of this story will doubtless sound familiar to almost any private equity investor.With the cost of debt skyrocketing and multiple expectations still at record highs,exits are at their lowest level since the global financial crisis(see Figure 1).On the

177、buy side,the problem is simple:In the years when multiple appreciation could reliably provide almost 60%of buyout returns,deal teams and their investment committees were willing to take considerably more risk on speculative upside cases.But that kind of thinking has gone the way of 0%interest rates.

178、Todays higher financing costs and macro uncertainty mean the margin for error in underwriting a deal has contracted sharply.Buyers are reluctant to bid without convincing evidence that every dollar of projected earnings growth is plausible and achievable.For sellersmost of whom have never seen a mar

179、ket as paralyzed as this onethe increased scrutiny can be a rude awakening.Theyre discovering the hard way that selling anything in todays market requires much more“show me the money”than most are used to.Over the past year,weve seen Figure 1:Global exit value and count declined significantly in 202

180、3,marking the worst year for selling a buyout-backed company in a decadeNotes:Includes partial and full exits;bankruptcies excluded;IPO value represents offer amount and not market value of companySource:DealogicGlobal buyout-backed exit value,by channel0250500750$1,000B01,0002,0002005250

181、8332826367952220490211,0222261323345Sponsor to sponsorSponsorto strategicIPO59%32%80%44%Total47%45%44%72%2023 vs.2022 2023 vs.5-yr.avg.Exit count30Global Private Equity Report 2024management presentations falling short in several ways that might not have m

182、attered as much in a more forgiving dealmaking environment:The plan doesnt draw a clear link between actions and results to date.It asserts confidently that growth will accelerate or outrun the industry without convincing rationale for why or how.Those growth projections are overly reliant on potent

183、ial adjacencies where the company has yet to demonstrate traction.The plan poses an M&A thesis that is heavy on“buy-and-build”and light on evidence that the strategy will accelerate organic growth or drive meaningful margin improvement.Ideally,of course,a strong exit story is an extension of the ori

184、ginal value-creation plan,meaning the company has,in fact,made a step change in performance and effectively positioned itself to capture a new,robust phase of growth.But more often than notespecially in a macro environment like this onereality intrudes in any number of ways:Things simply dont work o

185、ut as planned(can you say pandemic?).The core strategy stalls and/or an adjacency has yet to bear fruit.Maybe the original three-year plan has played out perfectly and the company needs a new strategy to power the next phase of growth.In these cases,deal and management teams have work to do to refre

186、sh their value-creation plans and recalibrate how they are approaching the market.The teams that are closing transactions these days build credibility among buyers in three important ways:They provide evidence of action-driven success during the holding period by linking positive results to specific

187、 management initiatives.They demonstrate that theres still money on the table by laying out a clear path to future value creation.Finally,they present clear reasons to believe by highlighting how the company has put points on the board with a new plan to accelerate revenue or improve profitability i

188、n the years to come.These are attributes that strengthen an exit story in any kind of market.The difference today is that they are compulsory,not“nice to have.”Action-driven successOne of the more difficult hurdles to get over in the current market is the suspicion that even strong company performan

189、ce owes more to economic and monetary tailwinds than true operational excellence.Getting past that perception requires a clear demonstration of how a companys performance has 31Global Private Equity Report 2024improved and why that is a direct result of the steps management has taken to make it a mo

190、re efficient competitor.A good example is Prelios,an Italian alternative asset manager that Davidson Kempner(DK)acquired in 2017.In the four-plus years that DK held the company,earnings before interest,taxes,depreciation,and amortization(EBITDA)had grown by a multiple of 9.Yet in early 2023,a buyer

191、could have easily concluded that the party was over.One of the more difficult hurdles to get over in the current market is the suspicion that even strong company performance owes more to economic and monetary tailwinds than true operational excellence.Although it started life in the 1990s as a real

192、estate investor,Prelios had successfully evolved into a credit servicing specialist working for both debt investors and banks to help them claw back returns from portfolios of nonperforming loans(NPLs).Two major tailwinds had supported its growth in the wake of the European debt crisis.First,the Eur

193、opean Central Bank pressured Italian lenders to sharply reduce their portfolios of NPLs,leading banks to outsource servicing of a large volume of these bad credits.Second,the Italian government helped that effort along by backstopping billions of euros worth of securitizations.But by the time DK wan

194、ted to exit the business in 2022,Italys volume of nonperforming debt had slowed.Banks had gotten their balance sheets under control,and investor portfolios had started to level off,raising the question of where Prelioss next phase of growth would come from.DKs answer was to show how the company had

195、changed for the better during ownership and to highlight its established ability to enter new businesses.DK drew a direct link between earnings growth and the work management had done during the firms holding period to make Prelios investment professionals more productive.The company had instituted

196、a detailed playbook that included target setting at a granular level,“performance dialogues”that institutionalized workout routines,hot lists of positions to be addressed,slippage monitoring,and coaching on how to fill performance gaps.Leadership also instituted a pay-for-performance plan to incenti

197、vize teams and individuals.The outcome was a much cleaner,results-driven organization.At the same time,Prelios had developed a new plan to leverage its expertise in credit analysis and debt collection in order to move into new businesses.The company had already transitioned from real estate to credi

198、t servicing in the early 2000s,and when the NPL business peaked,it had rapidly built an Engine 2 business in servicing unlikely-to-pay loans(UTPs).UTPs are a notch up the troubled-debt 32Global Private Equity Report 2024ladder from NPLs in that the bank still has a relationship with the borrower.Whi

199、le the credit analysis challenge is similar,the workout process involves a much higher degree of nuanced negotiation,which requires a different kind of talent.To build this new capability,Prelios hired professionals from different industries and backgrounds,trained them in the same operational impro

200、vements it had made in the NPL business,and quickly became Italys premier UTP specialist.The evolution allowed Prelios to more than double its assets under management.These initiatives not only led to a steep ramp-up in profitability,but they also preserved revenue growth and created a significantly

201、 more efficient culture of performance.When DK agreed to sell Prelios in 2023 for 1.35 billion(giving the firm a fivefold return on investment,according to public sources),the bet was that the company could continue to apply its workout expertise and its business-building skills in mining new asset

202、classes,both in Italy and abroad.Money on the tableIts clear that resolving the current disconnect between buyers and sellers can often come down to presenting new sources of value on a platter.Hinting at growth opportunities or regurgitating generic industry research wont be sufficient.The most eff

203、ective plans lay out in detail how the next round of initiatives will accelerate revenue growth or capture new efficiencies.To the extent thats not clear,it will likely require going back to the drawing board in the presale period to either refresh the original value-creation plan or devise a new on

204、e.Its clear that resolving the current disconnect between buyers and sellers can often come down to presenting new sources of value on a platter.Hinting at growth opportunities or regurgitating generic industry research wont be sufficient.When The Sterling Group merged two companies to create Safe F

205、leet in 2013,the combined entity manufactured a portfolio of branded equipment used across different types of vehicles and fleets to enhance safetyproducts like mirrors,lighting,and grab handlesas well as more sophisticated equipment like video surveillance and telematics to track fleet movement.The

206、 strategy was to expand this platform with strategic M&A.Over the course of Sterlings hold,the company made more than 10 acquisitions that materially expanded the business.But finding attractive M&A targets had gotten harder,and Sterling knew this would be an issue for potential buyers concerned abo

207、ut maintaining growth.So it encouraged 33Global Private Equity Report 2024management to start working on a new roadmapone that not only defined new sources of revenue but also demonstrated why Safe Fleet had a right to win in those areas.Safe Fleet had successfully established itself across a range

208、of fleet types that included school buses,fire trucks,emergency vehicles,railroad cars,and commercial trucks.The most obvious source of new growth was to expand the roster of products it sold into each vertical.The strongest exit story would have three components:a list of promising new products for

209、 each fleet type,a realistic measure of the total accessible market globally,and a justification for why Safe Fleet could expect to thrive in those adjacencies.An essential part of the“right to win”story was that the company had deep relationships with customers and supply chain partners that often

210、made a big difference in closing what were invariably complex sales processes.In the school bus vertical,for instance,Safe Fleet had relationships with the original equipment manufacturers,dealers,and,critically,school districts,which often have convoluted sourcing procedures.This had enabled a stro

211、ng record of upselling.Starting with simple hardware like stop signs and hatches,it had successfully moved into selling school districts on the need for fleet management and routing software.That deepened the relationships and enhanced stickiness.Building a similar story for each of seven fleet type

212、s resulted in a new value-creation plan that the next buyer could use to hit the ground running.That helped Sterling sell the company to another fund in 2018 at a return that made Safe Fleet one of the best performers in Sterlings portfolio.Reasons to believeBoth Safe Fleet and Prelios were able to

213、provide buyers with objective,fact-based evidence that they know how to succeed in the businesses and activities that would drive growth into the future.But given how reluctant buyers are these days to underwrite value-creation initiatives on spec,the easiest way to build confidence is to produce so

214、me early wins.Since Brad Fauvre and Conan Barker cofounded Velocity Vehicle Group in Southern California 25 years ago,the company has built a global chain of commercial truck dealerships through a proven model of buy,integrate,and improve.It has steadily added new outlets in attractive markets and u

215、ses strong process improvement capabilities to speed up service and product delivery,leading to increased regional market share.Its outlets provide the full range of new and used commercial vehicle sales,service,and parts distribution,as well as vehicle rental and leasing.By the time Velocity partne

216、red with The Cranemere Group in 2019,it had already expanded into Arizona and Nevada.Cranemere,a holding company with permanent capital,shared the founders vision to accelerate growth through M&A,and Velocity continued to acquire US dealerships,adding operations in five Southeastern states.The bolde

217、r move,though,was international expansion.Betting that its best-in-class operating model would translate around the world,Velocity acquired dealerships in Australia,Mexico,and Canada,34Global Private Equity Report 2024rapidly applying the process improvement formula that had worked so well in the US

218、.Since joining forces with Cranemere,Velocity has more than tripled revenues and meaningfully expanded margins,particularly in the newly acquired dealerships.Roughly half of that growth has come from its international expansion,and,in 2024,Velocity will be generating more revenue internationally tha

219、n it was from its entire US operation just five years ago.The international expansion opportunity promises to deliver additional growth for many years to come and is the kind of proven initiative that would demonstrate to a buyer how Velocity can build on its past success.While for many investors th

220、is would present a chance to sell and declare victory,Cranemere and the shareholders providing its permanent capital are focused on working in partnership with a world-class management team to reap powerful long-term compounding.Addressing todays challengesThe shared moral of these stories is that,i

221、n a market as difficult as this one,action is required.Faced with a steadily building exit backlog,its going to be important for funds to evaluateasset by assetwhere the current value-creation plan stands,how potential buyers are likely to view a companys future prospects,and what needs to be done t

222、o make each asset stand out in an increasingly crowded market.Fund managers can start to set priorities by asking a few key questions about each portfolio company:Have competitive or market dynamics changed(or will they change),and are we aligned with management around what to do about it?Do we know

223、 how much gas current strategies have left in the tank,and have we developed a data-driven perspective on the value left to pursue?What new initiatives is management working on to spur the next phase of growth,and how much traction has there been so far?If those initiatives or traction are lacking,w

224、hat needs to happen to develop a new plan that will show buyers why this company has potential?Is the team in place the right one for the next stage of growth,and are we confident that buyers will see it the same way?What functions or capabilities do we need to strengthen to increase credibility?All

225、 of this helps zero in on one overarching concern:Do we really understand how potential buyers will perceive this companys performance to date,and have we drawn clear links between specific initiatives and their impact on EBITDA?Every business is different,and determining whats workingor what needs

226、to workis a process.But the time to start developing a bulletproof exit story is now.Spinning a great yarn might have impressed suitors in the past.But objective evidence of both past performance and future potential is what will attract and hold a buyers attention today.3535Have Secondaries Reached

227、 a Tipping Point?At a Glance Given the industrys liquidity crunch,its no surprise that secondary funds grew faster than any other asset class in 2023.These funds provide an array of tools GPs and LPs can use to manage their own liquidity needs as well as those of their stakeholders.Secondaries remai

228、n puny relative to the rest of the industry,but theres every reason to believe they will find a way to scale.One number$3.2 trilliongoes a long way toward explaining why secondary funds raised 92%more capital in 2023 than they did in 2022(albeit from a very small base).Thats the unrealized value rep

229、resented by the 28,000 unsold companies weighing down buyout portfolios globally,more than 40%of which are four years old or older.This backlog is massive by historical standardsfour times by value what it was during the global financial crisisand a flash point in the liquidity crunch plaguing priva

230、te capital markets broadly.Private equity needs liquidity.Expanding the market for secondary funds may be the solution.By Hugh MacArthur,Brenda Rainey,Or Skolnik,and Alexander De Mol36Global Private Equity Report 2024With exit markets dormant across the alternatives industry,funds of all kinds are b

231、adly in need of ways to get cash back to investors and keep the private capital flywheel spinning.Enter secondaries,a catchall term for funds that help general partners(GPs)and limited partners(LPs)sell or restructure private capital holdings to generate liquidity.While the asset class is small,it i

232、s growing rapidly.At the moment,secondary transactions provide only about$120 billion in liquidity annually for an industry with over$20 trillion in assets under management globally(this vs.US public equity markets,which turn over more than$200 billion in assets daily).But given the rapidly expandin

233、g need for liquidity solutions in private capital,the potential for continued growth is exponential.The challenge:devising the innovative structures needed to capture the opportunity at scale.With exit markets dormant across the alternatives industry,funds of all kinds are badly in need of ways to g

234、et cash back to investors and keep the private capital flywheel spinning.Secondary funds have been around since before the global financial crisis.They started as pools of capital formed to let LPs sell GP positions when they needed cash faster than GPs could provide it.In those early days,growth wa

235、s limited by the stigma attached:Abandoning a GP was akin to acknowledging youd somehow made a mistake.But as the industry has exploded and the need for liquidity solutions has grown,rapid innovation has produced a wide variety of tools that both LPs and GPs can use to manage the increasingly comple

236、x needs of their stakeholders.LPs have embraced secondaries to rebalance portfolio exposure across strategies,geographies,vintages,and funds.They can now securitize positions via structured portfolios traded on the bond market.GPs are using direct secondaries,continuation funds,and“strips”of portfol

237、ios to generate liquidity when exit markets sputter(as theyre doing today).Tools are also available to raise cash for firm-level objectives like succession management or expansion.Utility,however,isnt the only thing fueling the growth of secondaries.Because the fund and company positions at the hear

238、t of these products are initially sold at a discount to market value,they also deliver strong,consistent returns for investors with less volatility.Indeed,secondaries are the only alternative asset class in which even the fourth quartile of funds ekes out a positive return(see Figure 1).GP-led secon

239、daries generally contain solid assets backed by high-quality managers and are expected to deliver strong performance.They also have a shorter payback period(or J curve)than typical private 37Global Private Equity Report 2024capital investments because the assets are already approaching maturity.And

240、buying exposure to private capital through secondaries offers a quicker path to a diversified portfolio for investors who are new to private markets.While the liquidity crunch behind the secondaries growth spurt will eventually subside as exit markets slowly recover,there are plenty of reasons to be

241、lieve demand for these products will continue.One potential driver:a shift in the sponsor-to-sponsor channel,which currently accounts for nearly 30%of all buyout-backed exit activity.These deals are fine,but GPs increasingly question why they should sell their best assets to a peer,just to watch the

242、 buyer capture future returns.A secondary fund presents an alternative by stepping in with a continuation vehicle that allows a sponsor to sell off part of a company but maintain control and continue to realize the upside.This way,the GP can offer liquidity to LPs who want to get out at a price set

243、by an independent third party,while the secondary sponsor finds a consortium of new LPs or GPs who want a chance to get into the company(or companies)at a new price.Todays secondary funds typically lack the scale to underwrite sizable transactions on their own,so they tend to recruit other,similar f

244、unds to participate in big deals.But thats changing as buyout funds seek to close the funding gap.A recent example is Accel-KKRs investment in LEA Partners continuation vehicle,which extended LEAs ownership of two portfolio companies,Zvoove and OneQrew.Variations Figure 1:Secondaries post strong ret

245、urns relative to other private asset classes,with even the fourth quartile above waterNotes:Private equity includes buyout and growth equity;natural resources includes private equity energy,upstream energy and royalties,and timberSource:Cambridge AssociatesNet IRR dispersion,by asset class(vintage y

246、ears 200019,as of Q2 2023)2002040%SecondariesPrivate equityVenture capitalReal estateNatural resourcesMedian5%25%2nd quartile3rd quartile75%95%38Global Private Equity Report 2024on this theme of a buyout firm backing a peers continuation vehicle have the potential to dramatically transform the spons

247、or-to-sponsor exit channel.Another stimulus for secondaries demand is private capitals ambition to court wealthy individualsspecifically,sophisticated investors who are increasingly hungry for diversification and stronger returns than public markets can deliver.Right now,individuals account for only

248、 around$4 trillion in alternatives assets under management,but the industry is poised to expand that to$12 trillion over the next decade.One major hurdle to this growth is liquidity,but secondary firms are already stepping up to address the problem.Lexington Partners,for instance,teamed with Moonfar

249、e,a digital platform that offers individual investors access to private markets.Lexington participates in Moonfares secondary market,enabling its clients to periodically cash out of their private capital investments.The critical thing in any of these scenarios is the presence of an honest broker.All

250、 sides of a transaction need to know that a trusted third party is determining value and structuring deals fairly.As happens too often today,a GP will set up a continuation fund to restructure a portfolio company,recapitalize the balance sheet with a swath of new equity,and essentially cram down the

251、 existing LPs,giving them the choice of getting out at a big discount or staying in on the bet that a hoped-for return will eventually materialize.Such stories have often left a bad taste in the marketplace,something new structures will have to solve for with independent valuations based on rigorous

252、 due diligence.It will also be critical to rapidly increase the amount of capital flowing into secondaries and build out the infrastructure underpinning scale.In a world where most other strategies draw concerns for having too much dry powder,the secondaries space is undercapitalized.Currently,the a

253、sset class has about$200 billion of dry powder,or enough to fund only about 20 months worth of transaction volume.Given private capitals propensity to fill a vacuum profitably,however,this state of affairs is unlikely to last long.For large investors like sovereign wealth funds,the returns and flexi

254、bility offered by secondaries will become more and more attractive.The same could be said for the giant investment houses managing trillions in wealth for individuals eager to access alternatives.Already,we are seeing major private fund managers positioning themselves to grow in the space.Deals like

255、 CVCs acquisition of secondary player Glendower Capital,TPGs acquisition of NewQuest,and Oaktrees investment in 17Capital are reshaping the marketplace.The landscape tomorrow will look very different from the one we see today.But its a safe bet that smart people will find a way to match the markets

256、massive need for liquidity solutions with the equally massive pool of capital available to fund them at scale.3939Building a Stronger Buy-and-BuildAt a Glance Buy-and-build continues to be one of private equitys most popular strategies.But a sustained period of higher interest rates is making it a l

257、ot harder to drive returns,especially for platforms that were relying heavily on multiple arbitrage.Generating a strong exit in this environment will require doubling down on a strategy to produce organic growth and better marginsor finding one fast.Theres a good reason buy-and-build has been a core

258、 private equity strategy for as long as the industry has been around:When it works,it works beautifully.The trouble in todays market is that making it work can be a major challenge.We define buy-and-build as an explicit strategy to increase value by using a well-positioned platform company to make a

259、t least four repeated add-on acquisitions of smaller companies.The idea is to ensure that 1+1=3 by capturing the benefits of scale and scope.Historically,the market has encouraged these combinations by assigning higher valuations to larger companies than it does to smaller ones.This opens the door t

260、o multiple arbitragethe practice of Winning now demands an intense focus on organic growth and margin improvement.By Cdric Bovy,Colleen von Eckartsberg,Emily Miller,and Thomas Hood40Global Private Equity Report 2024creating a large,high-multiple company by tucking in add-on acquisitions at lower mul

261、tiples.That brings down the average cost of acquisition,sweetening the return at exit.The recent spike in interest rates,however,disrupts this virtuous scenario in several ways.Consider a typical platform company acquired several years ago at 12 times earnings and financed with 7 turns of variable-r

262、ate debt.The cost of financing today is approximately double what investors were modeling in 2020,meaning it has gotten significantly harder for this company to service its existing debt,let alone fund an opportunistic acquisition strategy to meet growth projections (see Figure 1).At the same time,m

263、ultiple arbitrage for this platform is harder to capture.Because higher interest rates are putting downward pressure on asset pricesparticularly leveraged assetsa platform acquired and added to in a low-rate environment is probably worth less today than it was a year or two ago.That might upset the

264、anticipated multiple-arbitrage opportunity relative to assets acquired today.Adjusting to the new realityFor buy-and-build strategies launching today and adjusted for current economics,the math might still work.But many platform deals were started in a low-rate environment and arent yet completed.Fo

265、r them,generating an acceptable return has gotten a lot harder.Figure 1:Interest rates on leveraged loans have shot through the roof,and issuance has fallen dramaticallyNotes:European institutional spread includes all tracked LBO deals,regardless of size;US large corporate defined as LBOs with more

266、than$50 millionin EBITDA;Europe syndicated loan volume converted using euro/US dollar conversion rate of 1.076Sources:LCD;LSEGLeveraged buyout(LBO)yields0.02.04.06.08.010.012.0%2012 819202122 238.9%10.9%12$64B590132350(56%)Syndicated LBO loan is

267、suance($B)US large corporateEuropeUSEuropean institutional41Global Private Equity Report 2024The data suggests that these uncompleted deals comprise a substantial portion of the market.When we last wrote about buy-and-build in 2019,we noted that more than 30%of add-on deals represented at least the

268、fourth acquisition by a single platform company,up from 21%in 2003.Today,that number is close to 50%(see Figure 2).At the same time,the total value of add-ons has declined over the last two years.The implication is that more sponsors are hustling to try to complete buy-and-build strategies than are

269、trying to launch new ones.Making these deals work at exit is going to require doubling down on organic value creation.For many,that will mean recharging the deals underlying strategic foundation.For others,it will mean finding a new one soon.In the absence of a multiple-arbitrage boost,those that ha

270、d flimsy strategic rationale from the start are in a particularly difficult place.Looking at a set of 44 buy-and-build deals made between 2010 and 2019,those that depended on multiple arbitrage alone to generate returns had an average multiple on invested capital(MOIC)of 1.4x.Those with a strategic

271、rationale driving accelerated organic growth or meaningful margin improvement had an MOIC of 2.2x.The deals generating the highest returns start with an essential gating question:What value are you really capturing by making this particular set of acquisitions with this particular platform company?I

272、ts certainly important that the platform company is in a sector with ample growth potential and sufficient white space for acquisitions.But thats really just table stakes.Whats critical is a detailed Note:Represents the year in which add-on was acquiredSource:PitchBookShare of global add-on transact

273、ion volume,by sequence for platform company020406080100%3782250235,769492001st2nd3rd4th5th or laterAcquisitionShare of add-ons that are4th or later(%)Figure 2:Add-on transactions that are part of a broader buy-and-build strategy have grown steadily and now

274、 make up around half the global total42Global Private Equity Report 2024blueprint for how consolidation will open up new customer segments,add lucrative new geographies or channels,expand the customer offering,or substantially improve operations.Even if those opportunities do exist,success ultimatel

275、y relies on M&A expertise,thoughtful integration,and the capabilities to execute a clear and actionable value-creation plan.Strong returns in todays market will also require an especially compelling exit story,including clear evidence that what youve built will continue to outperform in the years ah

276、ead.What does good look like?Lets examine three different flavors of success.EIS:ensuring bigger is,in fact,betterThe right strategic logic isnt always obvious from the outside in and has to be tailored to the business.When Audax Private Equity carved out a noncore distribution business from Genuine

277、 Parts Company in 2019,determining the best path forward required some nuance.At the start,Audax split the business into three parts.It spun off one right away and kept the other twoGenuine Cable Group(GCG)and Engineered&Industrial Solutions(EIS)as buy-and-build platforms.Most rollups focus on captu

278、ring regional market share,but EIS was inherently more complex.As a value-added distributor of materials and components used in electrical and electronic applications,the company sold to large original equipment manufacturers(OEMs)of products like motors and transformers.The basis of economics in th

279、is business lay in expanding the companys share of a given end products bill of materialsselling more materials,components,and value added-services into the same transformer,for instance.EIS had expertise in these markets,but underinvestment over the years had led to a lack of focus and weak perform

280、ance.Audax saw an opportunity to rekindle growth by sharpening the companys focus on its core OEM customers while expanding into related aftermarket channels and cracking promising new end markets such as electric vehicle batteries and alternative energy.To get there,Audax recruited a new team of ex

281、ecutives and challenged them to closely define where EIS should be playing and to create the right go-to-market organization to attack each type of customer differentially.The company supported this focus with a targeted M&A agenda that included acquiring a set of distributors to add scale to the co

282、re and expand access to OEM customers,as well as several scope acquisitions like Norberg and Power Grid Supply that opened access to key aftermarket segments.Bringing all this together has been a process.EIS has transformed its commercial capabilities,adding digital tools,inside selling resources,an

283、d a new pricing platform.It has also zeroed in on integration,creating value by unifying enterprise resource planning and IT systems across the full business.Theres still work to do,but earnings at EIS have grown threefold since Audax got involved,and the gross margin profile continues to improve.Mo

284、st important is that EIS has linked its M&A strategy to a clear commercial roadmap that will drive future growth strategically.43Global Private Equity Report 2024Culture change at scaleIts axiomatic that scale can reliably drive superior economics for a platform company.But lasting value often comes

285、 from marrying scale with a broader strategy of performance improvement.Consider the case of Caliber Collision,which started its journey under private equity ownership in 2008,when Canadas ONCAP acquired it.Since then,the company has grown steadily through a succession of private equity sponsors and

286、 is now owned by Hellman&Friedman,which bought it in 2019 and merged it with another portfolio company called ABRA Auto Body&Glass.Today,it has more than 1,700 centers in the US and has expanded into auto glass and maintenance.Its axiomatic that scale can reliably drive superior economics for a plat

287、form company.But lasting value often comes from marrying scale with a broader strategy of performance improvement.It would be a mistake,however,to view Caliber as a simple growth play.While the original chain was good enough at fixing cars from a quality perspective,it put little emphasis on custome

288、r service.That was a liabilitynot only for customers deciding on where to take their cars but also for their insurance companies,which Caliber relied on for a large share of its business.Realizing that substantial value lay in creating a better customer experience,new management launched what amount

289、ed to a cultural transformation.Adopting the tagline“Restoring the rhythm of your life,”Caliber installed systems and processes to firm up estimates,shorten turnaround time,and improve customer communication.Managers and technicians were not only trained in technical skills but also coached in how t

290、o communicate timelines to customers,while explaining everything and showing them empathy at an especially difficult time.This mission-driven model still sits at the center of Calibers growth strategy.For each new Caliber shop,the company deploys a“tiger team”to train up the staff while replacing IT

291、 systems and implementing new dashboards to monitor operational key performance indicators(KPIs)like capacity utilization.This repeatable model leads to big jumps in efficiency,high marks for Net Promoter ScoreSM,and low employee turnoverall competitive advantages in an industry never known for warm

292、ing up to customers.Size does matter,though.Having a national footprint and strong operations allows Caliber to be a provider of choice for insurance companies,which like to push volume through large,integrated operations that consistently provide high-quality,efficient service.The larger platform a

293、lso let Caliber expand into branded auto glass and maintenance centers,adding new revenue streams.Increased 44Global Private Equity Report 2024scale,in other words,has been a critical strategic goal.But without continuous improvement at the shop level,it wouldnt mean much for long-term performance.P

294、artner in Pet Food:M&A as a transformation toolUsing M&A strategically to broaden scope can set the right platform company on a new trajectory in terms of where growth is coming from and how profitable it is.Partner in Pet Food(PPF),for instance,was plugging along just fine when Cinven acquired it i

295、n 2018.The company was Europes leading private-label pet food operation and had a steadyalbeit lower-marginbusiness.Cinven saw an opportunity to take it up a notch by adding new products,channels,and purchase occasions(snacks,for example).That would create a more vibrant competitor with superior eco

296、nomics.The firms targeted Partner in Pet Food M&A strategy laid out four key objectives:improve efficiency by adding manufacturing expertise in the core business,boost margins by expanding into branded products,open new growth channels(e-commerce,specialty retail),and increase scale by expanding geo

297、graphically.The first step was to build a dedicated M&A capability to find and evaluate targets.The team launched a continuous market-screen process to identify companies that would address one of the four strategic focus areas.The highest-potential targets were then evaluated based on a defined set

298、 of KPI benchmarks,potential synergies,and the ability to generate a strong return on investment.A good example was Doggy,a Swedish company PPF acquired in 2020.As Swedens largest manufacturer of branded cat and dog food,the company gave PPF quick access to the Nordic region with a lineup of high-ma

299、rgin products sold in specialty stores.A complementary acquisition in Italy opened up that market and pushed PPF into dog and cat snacks,another high-margin product category.Five key acquisitions over three years have transformed a low-growth commodity pet-food manufacturer into a diversified,brande

300、d company with much stronger earnings potential.Revenue has tripled since Cinven bought it,and the companys new M&A capability has burnished its exit story by ensuring that PPF can pursue more acquisitions in the future.What these three stories have in common are not the specific levers the deal tea

301、ms pulled to create value.The right initiatives will always fit the platform company like a bespoke suit.The common denominator is a recognition that“bigger is better”alone isnt a strategy.Neither is multiple arbitrage.More than anything else,succeeding at buy-and-build is about harnessing benefits

302、of scale and scope to drive sustainable,profitable growth.And thats never been more true than it is today.4545Harnessing Generative AI in Private Equity At a Glance Generative AI is asserting itself as a game-changing technology across the global economy.The private investors taking full advantage a

303、re already using it to transform portfolio companies,sharpen due diligence,and make investment professionals smarter.They are also finding that focus is key:Targeting investment toward a few strategic or operational objectives is essential to producing measurable improvements at the bottom line.A ye

304、ar into the explosive advent of generative AI,its become increasingly obvious that these technologies truly do promise game-changing disruption for many industries and business functions.While theres been no shortage of wild-eyed exuberance since ChatGPT launched in late 2022 and showed the world wh

305、at generative AI is capable of,theres been no shortage of substance,either.Generative AI is a critical reasoning engine capable of having an open-ended conversation with a customer,producing rich marketing content,and scanning vast stores of data to provide deeper insights.The impact across industri

306、es and business functions is already plain(see Figure 1).Investors are already using these technologies to transform companies,make better decisions,and boost returns.By Richard Lichtenstein,Gene Rapoport,Richard Allinson,and Karen Khalaf46Global Private Equity Report 2024In private capital,we see f

307、irms mobilizing in three important ways:Within the portfolio,they are wasting no time gaining insight into the potential impacts and opportunities across companies and industries.Will these technologies disrupt a portfolio companys value chain or economic model?Is there a chance to lead the change b

308、y leveraging generative AI?With a short list of companies in hand,firms are producing results by linking initiatives to strategy and executing through rapid test-and-learn efforts.Theyre finding that focus and change management mattera lot.In due diligence,leading teams are developing scorecard-base

309、d protocols to assess generative AI threats and opportunities in every diligence the firm takes on.The aim is to make it as routine as legal or commercial diligence.Firms are also using AI tools to speed up and sharpen the underwriting process.In many cases,generative AI presents the unique opportun

310、ity to build prototypes in diligence that can rapidly prove(or disprove)a disruption thesis.At the firm level,generative AI offers plenty of ways to streamline or automate back-office functions.But its real power is to dramatically expand the scope of information that the firm brings to bear on inve

311、stment decisions.These tools can leverage a firms scale by making institutional knowledge instantly available to everyone who needs it.Figure 1:Generative AIs dramatic ability to transform work is evident across a range of occupations and industriesSources:OpenAI,OpenResearch,UPenn(March 2023);Natio

312、nal Bureau of Economic Research(November 2023);Microsoft,GitHub,MIT(February 2023);MIT(March 2023);JAMA Internal Medicine(April 2023)Knowledge tasksContact centersSoftwareWritingQuality of output47%of worker tasks inthe US could beaccelerated usinggenerative AIbasedsoftware and tools14%productivity

313、boostacross call centeragents using agenerative AIbasedassistant(measured inresolutions per hour)34%productivity boostfor the lowest-skilledagents21%higher quality score on occupation-specific writing tasks(assessed byexperiencedprofessionals in thesame occupations)56%faster codingachieved bydevelop

314、ers usingGitHub Copilot37%faster completionof tasks like pressreleases,short reports,and emails byprofessionals usingChatGPT79%of healthcareprofessionals preferred a chatbot tophysician responsesto about 200 medical questions47Global Private Equity Report 2024Drawing a bead on value in the portfolio

315、Like any technology,generative AI is best deployed as a tool in service of strategy.It doesnt create value by itself but by linking explicitly to pragmatic business objectives.How can we better serve our customer?Which metrics are we trying to inflect,which processes are we trying to improve,or whic

316、h people are we trying to make more efficient?Scattershot initiatives will not drop any money to the bottom line,but a series of use cases targeted at a specific role or process very well might.While starting now with a test-and-learn mindset is critical,its as important to prioritize investment aga

317、inst the initiatives most likely to deliver the highest value.Like any technology,generative AI is best deployed as a tool in service of strategy.It doesnt create value by itself but by linking explicitly to pragmatic business objectives.For CVC,that meant applying a generative AI lens to more than

318、120 of its portfolio companies across geographies and investment strategies.Starting from an industry perspective and drilling down to the company level,the firm asked several key questions for each asset:Is the underlying customer need likely to change?Is the business model under threat?Will genera

319、tive AI enable new competitors?And what barriers to entry or competitive moats exist to protect against disruption?CVC sorted companies into three buckets:those that face revolution in the very short term,those whose business is likely to transform over the next few years,and those where meaningful

320、disruption is unlikely.This analysis helped the firm prioritize which companies would benefit most from investment,and when.One of them was Italian online educator Multiversity Group.Education is widely viewed as a sector with potential generative AI applications,and CVC saw that Multiversity was un

321、iquely positioned to develop a strong AI-enabled business model.The company had robust market share,fully accredited content,and participation in a highly regulated university landscape.Even before generative AI came along,it was developing a set of initiatives to improve everything from how student

322、s enrolled in classes to how they interacted with professors.The million-dollar question was how the company could accelerate those efforts using generative AI.The answer was setting up an“MVP accelerator”to identify generative AI applications,develop the business case,build a minimum viable product

323、(MVP),and test and learn to refine a solution.48Global Private Equity Report 2024One example was using generative AI modules to answer routine questions from students about class content or administrative issues that take an inordinate amount of a professors time.The initiative removed 80%of those q

324、uestions from professors plates,allowing them to redistribute that time to more value-added activities like course planning and one-on-one interactions with students.This benefit to instructors helped ensure their adoption of the technology.The MVP accelerator put as many as 30 initiatives in motion

325、 and institutionalized the companys ability to innovate.It not only buttressed Multiversity against competitive incursion but will also burnish the companys exit story.Going through this exercise at Multiversity and other companies in its portfolio,meantime,has turned into a master class in generati

326、ve AI for CVC.Scanning the portfolio is making the firm smarter and enabling it to be more responsive when it comes to deploying these technologies.Bolstering due diligenceMany of the questions around threat and opportunity in a portfolio scan are also foundational to the most effective generative A

327、I diligence scorecards.Additionally,its important to assess organizational readiness.Has the company developed a vision for how it can deploy these technologies?Does it have a data strategy,and has it developed use cases?Is the right talent in place to execute,and does the company have a track recor

328、d when it comes to innovation?As generative AI gains speed,it will become increasingly critical for firms to institutionalize this kind of scrutiny.Deal teams should be doing a fast analysis of any target company,asking whether generative AI is likely to have an impactpositive or negativein the year

329、s ahead.The quick answer may be no.But anything other than that is worth investigating further.As generative AI gains speed,it will become increasingly critical for firms to institutionalize this kind of scrutiny.Deal teams should be doing a fast analysis of any target company,asking whether generat

330、ive AI is likely to have an impactpositive or negative in the years ahead.For one firm targeting an IT services company,that meant determining whether generative AI could make key functions more efficient.Given the companys rapid growth,the objective wasnt to cut staff.But the potential new owner wa

331、nted to project whether future growth could be made more profitable using AI.49Global Private Equity Report 2024An analysis of various knowledge-work tasks across the company suggested that several departments could do more with less by automating certain activities and using AI to speed up others.T

332、hat could generate margin improvement of 10%to 15%in the midterm as revenue expandedenough to give the buyer an added layer of conviction that the target would be able to justify its multiple.Due diligence teams can also use generative AI to get a more complete picture of a target companys prospects

333、.Powerful tools are rapidly emerging to scan reams of data in a fraction of the time it would take a human to do the same job.One Bain&Company tool can ingest 10,000 customer reviews,print charts,and summarize findings within minutes.Another can summarize interviews with customers and market participants,converting unstructured text data into structured formats.These tools widen the aperture to mo