Back to School: Private-equity shakeout? Not really

More than a quarter of the buyout firms that successfully fundraised from 2002 to 2008 didn’t raise another fund after the global financial crisis, according to data included in Bain & Company’s 2016 private-equity report.

It could have been much worse.

Bain found roughly 1,000 general partners faded from the industry in the years following the crisis. “The financial crisis and downturn that followed culled the young and weak, as recessions are wont to do, but barely put a dent in the health of the PE industry overall,” according to the report.

Indeed, general partners who failed to return to the market represented just 6 percent of the industry’s assets under management for funds raised in the 2002-2008 period. This compares favorably with the post-tech-bubble shakeout, in which shuttered firms represented 20 percent of buyout assets under management.

Perhaps more important, most of the industry’s more mature GPs successfully navigated the recession. More than half the firms culled by the shakeout raised only one fund prior to the financial crisis.

For this reason, Bain & Co’s annual report refers to the post-crisis era as “the shakeout that didn’t happen.”

“The number of firms not re-raising came in at the expected range, but assets under management didn’t move at all,” said Hugh MacArthur, Bain & Co’s global head of private equity. “The overall return picture for the industry was much more favorable than initially thought.”

Many firms avoided the shakeout by refinancing their portfolio companies in the months leading up to the economic collapse, MacArthur said. “A lot of PE firms were aggressive in restructuring the balance sheets in a way that allowed them to survive.”

Firms were also buoyed by central banks’ steep reductions in interest rates, he said. Lower interest rates on debt kept purchase-price multiples high, which in turn provided firms that were exiting their portfolio companies with an incremental bump in their returns.

Distributions from pre-crisis vintages fueled a five-year surge in capital distributions to limited partners. LPs then re-invested those distributions as commitments to new private-equity funds. As a result, the impact of private equity’s widely anticipated “shakeout” was considerably softer than what many projected.

“That’s been a rising tide that’s lifted a lot of boats,” MacArthur said.

Action Item: To download Bain & Company’s 2016 annual report, visit

Photo courtesy of Reuters/Mariana Bazo