The great PE consolidation and what it could mean for search funds?

September 25, 2023

by an investor from INSEAD in Barcelona, Spain

3 days ago, PitchBook’s Andrew Woodman published a great overview of how the private equity industry is undergoing notable consolidation.

Larger PE firms are acquiring both similar-sized and smaller counterparts, driven by a mix of tougher economic conditions and the natural progression of a maturing industry.

For instance, mega-deals such as EQT Group buying Baring Private Equity Asia (BPEA) highlight the scale of this consolidation.

Here are 4 interesting insights from Andrew's article.

1️⃣ Despite seeming stabilization, mega-funds (funds with over $5 billion in commitments) still dominate, contributing to 36.8% of all PE commitments. Funds over $1 billion make up nearly 79% of all capital raised.

2️⃣ The reduced number of players in the market can also lessen competition, leading to potential downsides for Limited Partners (LPs), such as higher fees and decreased diversification.

3️⃣ Rising interest rates and added regulatory demands, especially from the SEC, pose challenges but also acquisition prospects for larger firms.

4️⃣ The growing power of massive PE managers could attract increased regulatory oversight, akin to the scrutiny faced by dominant tech firms.

How will these macro trends impact the search fund sector if at all?

https://pitchbook.com/news/articles/private-equity-MA-consolidation

#searchfunds #privateequity

Reply by a searcher
from Roosevelt University in Boston, MA, USA

Thanks for sharing ^redacted‌. Fewer PE firms (due to consolidation) is great for search funds as we do come across competitive deals at the higher end of our revenue/EBITDA range. The financial times recently reported that PE firms are saddled with portoflio companies bought at higher valuations and, combined with higher interest rates, have hastened a turn to private credit. Private credit will be offered as an alternative to higher-interest loans from banks.

https://www.ft.com/content/84409cde-1197-49c9-bf88-dbe371e44313

Reply by an investor
from University of Oxford in San Francisco, CA, USA

PE's main role within this community, and within these sized deals, is as a source of exits. So if there are indeed less small/mid PE buyers and/or less PE capital out there, that would suggest less appetite for fishing in our pool. So less liquidity for successful searchers/owners?

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