Private equity industry continues post-recession rebound, according to new PE Index released by PEGCC

WASHINGTON, DC, OCTOBER 21, 2010 – The global private equity industry in the third quarter continued its rebound from the 2008-2009 recession, but private equity activity has not yet returned to pre-recession levels, according to the new “Private Equity Index” released today by the Private Equity Growth Capital Council.

The PE Index is a composite measure of global private equity activity based on four key factors: total equity investment (including equity contributions to acquisitions and minority stakes); transaction volume; fundraising; and the dollar value of private equity exits (portfolio company IPOs or sales to corporations or other investors).

The Index measures 100 when all four components are at their ten-year moving average. These four factors were chosen to make up the index because collectively they capture the most fundamental elements of the private equity market.

For the third quarter of 2010, the Index stood at 104.33, up from 100.76 in the second quarter and 86.41 in the first quarter of the year. At its low point in the first quarter of 2009, the Index measured 60.39. The Index peaked at 150.83 in the second quarter of 2006. Moving forward, the Council plans to update the PE Index at the end of each quarter.

View PE Index slides

“The Private Equity Index seeks to synthesize a wide range of disparate data about private equity to provide an accurate snapshot of the state of the PE market at any given point in time,” said Council President Douglas Lowenstein.

“We hope it will be seen as an objective, fact driven, and easily understood tool for PE professionals, including general partners, limited partners and analysts, as well as others with an interest in tracking the market, such as regulators, business executives, policymakers, and the media,” Lowenstein added.

The Index’s surge since the second quarter was driven by a rising level of equity investment in global PE transactions — including equity contributions to buyouts, minority stakes, private placements, foreign investments, growth capital and other non-venture investments — as well as an increased dollar volume of private equity-backed acquisitions.

These positive trends were offset in part by a decline in fundraising from the previous quarter and a drop in dollar volume of PE-backed initial public stock offerings.

In the third quarter, total equity investment in PE transactions increased to a record $40.1 billion, up from $36.4 billion in the second quarter and $17.8 billion in the first quarter. Year-to-date global equity investment totaled $94 billion, also an all-time high.

The previous record was $80 billion of equity invested in the first three quarters of 2007. Dollar volume of private equity-backed acquisitions grew to $70.5 billion, from the $45.4 billion in transactions recorded in the second quarter and $32.6 billion in the first quarter.

While the total amount of equity investment and total dollar value of PE transactions have been rising steadily through the year, the share of the overall M&A activity attributable to private equity was 11 percent, well below the 2007 peak of 23.4 percent. Through three quarters, the total dollar volume of global PE-backed acquisitions is running at about one-fifth the pace of 2007.

“The spike in global equity investment is attributable to three principal factors,” said Jason M. Thomas, the Council’s vice president for research. “First, private equity firms in many cases increased the proportion of equity contributed to individual acquisitions, reflecting continuing tightness in credit markets. Second, firms made more minority investments, which tend to be all equity, as opposed to outright acquisitions. Third, firms increased their investments in faster growing companies, both in the United States and abroad, which typically require greater equity contributions.”

On the fund raising front, activity remained sluggish. Private equity fund commitments declined by 4.4 percent from the previous quarter. Year-to-date fundraising totals lagged behind those of 2009, chiefly because of large remaining callable capital reserves, known as “dry powder”. At the end of the third quarter, buyout and growth capital funds’ capital reserves stood at $465 billion, just below the all-time high recorded at the end of 2009.

“On the surface, the slow fund raising is a concern. However, given the fact that the amount of callable capital available to private equity investors is at near-record levels, it is less surprising,” Thomas explained. “The fact that U.S. private equity funds raised nearly $20 billion for investors through 88 sales to corporations and other entities in the quarter, and that North American private equity-backed IPOs generally performed well during the quarter, may signal that fundraising will pick up in 2011.”

The Private Equity Index is calculated using data provided by Thomson Reuters, Pitchbook, Preqin and the Council.

About the Private Equity Growth Capital Council

Based in Washington, DC, the Private Equity Growth Capital Council is an advocacy, communications and research organization and resource center established to develop, analyze and distribute information about the private equity and growth capital investment industry and its contributions to the national and global economy. Members are: American Securities; Apax Partners; Apollo Global Management LLC; Avista Capital Partners; Bain Capital Partners; The Blackstone Group; Brockway Moran & Partners; The Carlyle Group; Crestview Partners; Genstar Capital; Global Environment Fund; GTCR; Hellman and Friedman LLC; The Jordan Company; Kelso & Company;Kohlberg Kravis Roberts & Co.; KPS Capital Partners; Levine Leichtman Capital Partners; Madison Dearborn Partners; New Mountain Capital; MidOcean Partners; Permira; Providence Equity Partners; The Riverside Company; Silver Lake; Sterling Partners; Sun Capital Partners; TA Associates; Thomas H. Lee Partners; TPG Capital; Vector Capital; and Welsh, Carson, Anderson & Stowe. For more information, please visit our web site at:
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