REFILE-Private equity sits on cash mountain, wonders how to spend it - Bain

Mon Mar 3, 2014 12:30pm EST

By Freya Berry

LONDON, March 3 (Reuters) - Private equity funds face increasing deal-making competition in 2014, Bain & Company consultants said on Monday, with a record $1 trillion cash pile adding to the pressure to find strong investments.

While surging equity markets helped private equity funds to cash out on their investments in 2013, high asset prices have also forced down the number of buyouts by 11 percent as funds struggled to identify bargains, according to the Bain Global Private Equity Report 2014.

Many companies opted for flotations over private equity to capitalise on favourable conditions, Bain said.

But investors are still pouring money into the industry, whose undeployed capital, or "dry powder", rose 12 percent last year to a record $1 trillion, higher than levels before the financial crisis.

Buyout firms alone raised $191 billion in capital in 2013, 89 percent more than in 2012, thanks largely to the closing of nine mega-funds including Apollo's Fund VIII, the largest buyout fund since the financial crisis.

And although much of the cash mountain is fresh capital, easing time pressure on funds to put it to use, firms are struggling to find suitable targets.

Both the number and value of buyouts in the United States fell by just over a fifth in 2013, Bain said, after excluding the disproportionate influence of the mega-privatisations of Dell and Heinz, to an overall tune of $48.6 billion.

European deals rose by over a third in value, and fell 6 percent in number. Asian deals fell by 2 percent in value but rose by 8 percent in number.

Funds instead turned to selling their investments in order to post gains, with many assets acquired during the mid-decade boom years of the 2000s ripe for exits. The number of initial public offerings (IPOs) made by private equity companies rose by a compound annualised rate of two-thirds in 2013, although a backlog remains.

"The bright outlook on the exit front is a welcome sign for PE funds," said Graham Elton, head of Bain's Private Equity Practice in Europe, the Middle East and Africa.

"But the snake swallowed an elephant - and it takes a long time for the elephant to be cleared through the system."

DR DRE AND CROCS THE FUTURE?

Faced with a dearth of traditional deals, funds are becoming increasingly inventive, Bain said, highlighting a trend of minority control stakes and partnerships.

Both Carlyle and Blackstone, the number two and three private equity firms by capital according to Private Equity International, took up minority stakes last year, with Blackstone investing $200 million in footwear company Crocs.

Carlyle paid $500 million for a minority share in Beats Electronics, the headphones firm co-founded by U.S. rapper Dr Dre.

Its 2007 fund has invested 15 percent of its $13.7 billion in unconventional transactions, while its preceding 2004 fund has no such investments.

Funds may also look more closely at smaller deals. In the United States, 15 percent of companies with an enterprise value of over $500 million are owned by private equity firms, against just 3 percent of companies valued at less than $100 million.