Is Private Equity Headed for a New Buyout Boom?

By most measures, the global economy is continuing on a healthy, expansionary path.  Leading the way is the American economy, with the most recent growth figure coming in at a 3.1 percent annualized pace.  The healthy state of the global economy begs the question: is private equity headed for a new buyout boom?

Here’s what the most recent Pitchbook data show.

The Data Table

Before going into the visually appealing graphic, here’s the cash flow data into and out of the private equity industry, according to private equity data provider Pitchbook.

The second column from the left is the total contributions to the private equity industry, in billions of U.S. dollars.  In 2002, total contributions summed to about $64 billion.  Total contributions continued to expand from 2002 to 2007, peaking at about $256 billion.  The global economy then went south, and so did contributions to the private equity industry.  Contributions initially dropped from $256 billion in 2007 to $228 billion in 2008, then continued to fall precipitously, bottoming out at $137 billion in 2009.  Following the bottoming, contributions began to come back, although in a marginally choppy pattern.  At the end of 2016, total contributions to the private equity universe summed to about $236 billion.  Healthy, but still below the 2007 peak of $256 billion.

The middle column, third from the left, is total distributions.  In 2002, total distributions were about $28 billion.  The amount of distributions continued to grow from 2002 to 2007, peaking in 2007 at about $182 billion.  When the global economy soured, total distributions declined quickly, bottoming out at about $61 billion in 2009.  Since 2009, total distributions have expanded quickly, with the most recent 2016 estimate at about $303 billion.  The $303 billion is a drop from the 2014 peak of about $360 billion.

The last column, the far right column, is the difference between total contributions and total distributions, titled net cash flow.  Net cash flow in 2002 was about -$36 billion.  Net cash flow then continued moving positive, to -$22 billion in 2003, and then to about $22 billion in 2004.  Net cash flow then flipped again, bottoming at about -$128 billion in 2008.  After peaking, net cash flow continued to move towards positive, peaking at about $155 billion in 2014.  Since 2014, net cash flow has turned the opposite direction again, with the most recent 2016 value at about $67 billion.

Source: Pitchbook

The Visual View of the Net Cash Flow Picture

A picture is worth a thousand words – here’s the visual depiction of the previous discussion.  In orange is the net cash flow.  Given the cyclic nature of the private equity business cycle, and the recent turn towards negative net cash flow (the orange line), it appears private equity is headed for a new buyout boom (i.e. when net distributions are greater than net contributions).  Let the good times roll for private equity investors.

Source: Pitchbook

Conclusion

In looking at the most recent cash flow figures for the private equity industry, the picture looks bright.  Presuming the current downward trend in net cash flow continues through 2017 and into 2018, then the private equity industry is headed for a buyout boom, perhaps even surpassing the 2008 boom year by 2019 (it’s a very “big” perhaps, though).  Life is good in the private equity world.