NEW YORK–(BUSINESSWIRE)–Private equity (PE) is poised for a comeback in 2011,with increased optimism for a steady revival of deal, fundraisingand exit activity–but a fragile economy and credit market hangovercould derail PE's recovery; this, according to the 'Global PrivateEquity 2011 Report,' released today by Bain & Company, theworld's leading advisor to the PE industry.

Signs point to a healthy surge in demand for PE deals in 2011,according to the report, including:

• GPs still sit on nearly a trillion dollar stockpile ofuninvested capital, i.e. 'dry powder.' This dry powder willhelp fuel a predicted surge in deal volume in 2011, given theinclination by many GPs to 'put money to work.' This positive trendis somewhat tempered by the fact that approximately one-quarter ofthe $434 billion of the dry powder targeted for buyouts is'pressured capital'–committed capital in the hands of GPs withpowerful incentives to return profits to limited partners (LPs) andextend the life of their firms–which may cause some pressured firmsto overreach in their deal-making efforts and potentially drive updeal prices as a result.
• GPs will benefit from more stable debt markets. Majorimprovements in the dynamics of the debt markets increased theamount of leverage–a ratio of five times EBITDA by the end of2010–that PE investors were able to bring to the financing of LBOsand the softer covenants attached to it in 2010 should continueinto 2011, provided investor demand remains buoyant.

“PE firms are hungry to do deals,” said Hugh MacArthur, globalhead of Bain's Private Equity Practice. “But that hunger canquickly translate into heartburn for firms that ignore the newrealities of PE value creation.”

On the supply-side of the deal-making equation, Bain estimatesthat the supply–and range–of PE deals should increase in 2011.Strong public valuations and buyers' willingness to pay healthypremiums on acquisitions during 2010 will continue to draw sellersof high-quality assets into the market over the coming year. Twoadditional key factors are likely to anchor an increase ofpotential PE targets:

• Bull market continues for secondary buyouts.Sponsor-to-sponsor deals, aka secondary buyouts, will remainpopular in 2011 for several reasons: they can be completed moreexpeditiously than an IPO or a sale to a strategic buyer can, thereare more PE-owned companies available for purchase following 30years of deal-making, the fact that some companies are simplybetter suited for private ownership–given that these businesses arestable, enjoy predictable cash flows, require low capitalexpenditures and need limited working capital–and the relativeperformance of secondary buyouts which recent research shows isonly slightly lower than primary buyouts, yet with a lower riskprofile.
• A thaw in public-to-private deals. Robustpublic-to-private deal-making activity drove the last PE boom andwill be essential for powering a healthy recovery going forward.Bain's proprietary analysis of 1,400 larger US public nonfinancialcompanies concludes that more than 400 companies with a combinedmarket capitalization in excess of $1 trillion appear to havevaluation and cash flow characteristics that could support apublic-to-private transaction.

Other key findings from the report include:

• Pressures are building for increased exits in 2011.Unrealized investments for all PE funds swelled to $1.5 trillion bythe end of the second quarter of 2010–$663 billion for buyout fundsalone–a figure 50% higher than their holdings of dry powder andapproaching 60% of total capital under PE fund management, thehighest ratio in years. Seventy-percent of unrealized buyoutinvestments are concentrated in buyout funds of vintages between2005 and 2008 and virtually no buyout fund with a vintage after2004 has yet to return paid-in capital to its LPs.
• Signs point to a fund-raising rebound, but a supply-demandimbalance will challenge GPs. Based on past patterns,fund-raising, which historically lags investment and exit activity,has reached a cyclical low and is poised for a recovery. Even asLPs increase their new commitments in 2011, the number of new PEfund opportunities will continue to outpace demand–making for acrowded and challenging fund-raising environment for GPs.
• Brazil is hot. China, India and the other hot-growtheconomies of Southeast Asia continue to top the list of marketswhere PE firms and LPs see the most promising PE opportunities. ButCentral and Eastern Europe and Brazil particularly are attractingincreased PE attention. After Asia-Pacific, Latin America is todaythe second most-attractive emerging region, attracting nearly 25percent of the PE funds raised for investment in emerging marketsin 2010.

The report reveals that without market 'beta'–i.e. factorsrelated directly to market performance–in the form of strong GDPgrowth, expanding multiples and abundant leverage to drive returns,average PE returns will be more modest over the next few years.Bain believes future PE returns will be shaped more by'alpha,'–i.e. actions taken by GPs themselves, versus marketbeta–which will be created by four interrelated factors:

1. Develop an adaptive investment strategy built on corestrengths. PE firms need to keep in step with LPs' changingtastes, but they cannot pursue diversification fordiversification's sake. Bain analysis has found little correlationbetween the number of fund types or geographies in which a firminvests and its overall performance. Bain interviews with LPsreveal that many do not place a premium on firms that bridgeseveral fund types or geographies; LPs evaluate each fundopportunity on its own merits.
2. Strengthen and professionalize the organization. PEfirms need to attend to their organizational health and continuallyseek ways to professionalize, with a focus on four key areas–talentmanagement, full-time investor relations, resources to supportrepeatable value-creation processes and the firm's generalmanagement, because the business of running a PE firm has neverbeen more complex.
3. Have truly proprietary investment theses and beef up duediligence. Firms that are best in class recognize thatstrengthening their due diligence and investment-committeeprocesses helps them avoid losers and develop the proprietaryinsights required to stretch for winners in the higher-than-evercompetitive environment.
4. Build repeatable value-creation processes. Top GPs setthemselves apart by their ability to add alpha to their portfolioreturns through their distinctive portfolio-management strengths.They build processes that can be customized to the unique needs ofeach portfolio company and flexed to run through each portfoliocompany's life cycle.

“Top quartile PE firms must 'up their alpha game' now more thanever,” concluded MacArthur. “They won't rely on the market to dothe work for them.”

For a copy of Bain & Company's 'Global Private Equity 2011Report,' please contact Cheryl Krauss at email: [email protected].

About Bain & Company, Inc.
Bain & Company, a leading global business consulting firm,serves clients on issues of strategy, operations, technology,organization and mergers and acquisitions. The firm was founded in1973 on the principle that Bain consultants must measure theirsuccess by their clients' financial results. Bain clients haveoutperformed the stock market 4 to 1. With 44 offices in 29countries, Bain has worked with over 4,400 major multinational,private equity and other corporations across every economic sector.For more information visit: www.bain.com.

About Bain & Company's Private EquityBusiness
Bain & Company is the leading consulting partner to the privateequity industry and its stakeholders and is more than 3-timeslarger than the next-largest consulting firm serving private equityfunds. Private equity consulting at Bain has grown 11-fold since1997 and now represents about 25 percent of the firm's globalbusiness. Bain maintains a global network of more than 400experienced professionals serving private equity clients. In thepast decade, Bain & Company has advised on half of all buyouttransactions valued at more than $500 million globally. Bain's workwith buyout funds represents 75 percent of global equitycapital.

Beyond its work with buyouts, Bain works across fund types,including infrastructure, real estate, debt and hedge funds. Italso works for many of the most prominent limited partners toprivate equity firms, including sovereign wealth funds, pensionfunds, financial institutions, endowments and family investmentoffices. Bain has deep experience working in all regions of theworld across all major sectors–from consumer products and financialservices to technology and industrial goods. Our advisory servicesspan a broad spectrum of client objectives, including: dealgeneration, due diligence, immediate post-acquisition support,ongoing value addition, exits and firm strategy and operations.