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Private Equity

Private Equity

Private Equity is at an inflection point

Private Equity has over $5T in assets under management in North America, representing ~20% per annum growth over the last 5 years. This is despite a drawback of PE deal activity in 2022 and 2023 correlated with rising interest rates to combat post-COVID inflation. However, with lower inflation and a stable job market, the prospect of lower rates is increasingly likely, which will stimulate PE deal activity and deployment of ~$1.5T in dry powder. Regardless of how you cut the data, the fundamentals of private capital investment - dry powder, capital raised, investments, exits — show no indications of slowing.

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Several drivers of the market's growth are worth unpacking, especially from the prism of middle market investors. First, middle market fund returns (measured by one-year horizon IRRs) have not kept pace with $5 billion-plus funds.

Second, LPs have indicated a growing preference for mega funds, allocating larger shares of capital to the largest funds. This has resulted in a meaningful increase in large fund dry powder relative to middle market funds — from ~37% of total PE dry powder in 2016 to ~50% in 2023 — average fund size — from ~$250M in 2020 to nearly ~$450M in 2023. Combined with a growing sense of urgency across mega-funds to deploy capital, especially with recent increases in average holding periods, this will push deal multiples higher.

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This environment creates future challenges for middle market funds. While current exit multiples are exciting, buying assets today at higher multiples makes generating above market returns for recent fund vintages increasingly difficult. However, it is still attainable. To achieve above-market returns, middle market funds must emphasize quickly identifying and creating value (even pre-close) for each target.

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How Pointe Can Help

Pointe PE is dedicated to enabling sponsors create value with their investments. With more than 350 deals under our belt, we have found that each sponsor has unique needs. From targets in data poor market segments to first-time sellers underprepared for the process, our process is empathetic and “rightsized” as thought partners. For Pointe, that is all about delivering informed insights and remaining focused.

 

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Modeling the Market Potential

A PE fund was on an accelerated timeline to prepare its industrial production portfolio company for a sales process. Current sponsor anticipated that most prospective bidders’ thesis would focus on the target’s attractiveness as a platform play. Pointe developed an independent set of materials to model the market (and target’s) potential and prove out a variety of inorganic consolidation theses. Pointe’s unbiased insights enhanced the process and supported an abbreviated close timeline.

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