Private equity set a remarkable new standard for itself in 2021. Buyout deal value reached an all-time high of $1.1 trillion, doubling 2020’s total of $577 billion and shattering the previous record of $804 billion set in 2006 during the exuberant run-up to the global financial crisis. Deal size, not deal count, was behind this increase. The number of deals greater than $1 billion roughly doubled in 2021, with average deal size reaching $1.1 billion, increasing 57% to pierce through the $1 billion mark for the first time.

One reason for the sharp increase in deal value last year is the sheer volume of capital in the market. After 10 years of steady growth, dry powder set yet another record in 2021, rising to $3.4 trillion globally, with approximately $1 trillion of that sitting in buyout funds.

The opportunity to put large amounts of capital to work produced a sudden and sharp increase in public-to-private (P2P) deals, especially in North America and the Asia-Pacific region. These take-private transactions soaked up $469 billion in capital globally, a 57% one-year increase, and were largely responsible for 2021’s record-setting value total. The last time the market produced such an increase in P2P transactions was in the run-up to the global financial crisis in 2006-07. The key differentiator of today’s P2P deals is their smaller size. Today’s P2P deals are often done by one to two buyers with deep expertise in the sector, versus the consortia of buyers required for the large deals we saw in 2006-07.

By deploying large amounts of capital quickly over the last three years, buyout firms have seen their share of M&A activity globally rise to 19%, its highest level since 2006. The push, however, has come at a cost: average buyout multiples in 2021 rose to 12.3x in North America, and 11.9x in Europe.

The increased level of pricing across the industry may also reflect the bet that more investors are making toward specialization, especially on technology-fueled growth. One in three buyouts now involves a technology company. Continued growth in sectors such as fintech, healthcare and business services—where outperformance is increasingly a function of technology expertise—means technology is now a key invest­ment thesis in well over half of all deal activity.

In addition to investments, exits also roared to new records, with each and every exit channel about as attractive as it could be in 2021. Overall, buyout funds unloaded $957 billion in assets globally, more than doubling a strong 2020 total and beating the five-year average by 131%. Special-purpose acquisition company (SPAC) deals were particularly notable, increasing 325% from the year before and reaching $158 billion.

These are among the findings of Bain & Company’s 13th annual Global Private Equity Reportreleased today. Bain & Company is the world’s leading consulting advisor to private equity investors.

“Given the high prices paid in 2021, there will inevitably be an increase in pressure on deal sponsors to deliver results this year,” said Hugh MacArthurglobal head of Bain & Company’s Private Equity practice. “The chances of success are highest for firms with a long track record in a sector. To drive returns during this high-wired time, it is critical that dealmakers fully understand the microeconomics of the sector, the value creation levers available to pull and the risks they’re under writing.”

Private equity continued to deliver for investors in 2021. Buyout funds, on average, have generated stronger pooled net IRR than public markets, offering broader exposure, less volatility and returns that are better over time. A full 95% of LPs surveyed by Preqin in Q4 2021 said that the performance of their PE portfolio met or exceeded their expectations in the past year, although some predict a bit of cooling in the coming year.

Fundraising rounded out the list of last year’s record-shattering metrics. Global funds raised across the full private capital spectrum hit $1.2 trillion, the highest level ever reached. Buyout funds raised $387 billion in 2021, their second-best year ever. Investor enthusiasm for private equity shows no signs of waning. Nearly 90% of LPs surveyed by Preqin in 2021 said that they expect to increase or maintain their PE allocations this year, and 95% said they will do so over the longer term.

“While the conflict in Ukraine removes one dimension of uncertainty around the global macro picture, it adds many new ones,” said MacArthur. “Ripple effects from the Ukraine conflict will be felt far and wide. The most obvious impact will be on oil & gas supplies, which now face both political and physical risks. Amid the chaos, investors will be challenged to gain conviction around a most-likely scenario. Rather, private equity investors and their portfolio companies will need to plan for a wider-than-normal range of scenarios and watch closely as events continue to unfold.”

This year’s Global Private Equity Report explores key themes to watch in 2022, including pressures on ESG (Environment Social and Governance) metrics, a shift toward dealmaking in Asia and the growing challenge of inflation.

Closing the ESG measurement gap 
As more and more LPs and GPs seek ways to implement meaningful ESG strategies, they inevitably encounter a measurement gap that makes it difficult to gauge success. A lack of specific data standards and best practices related to ESG is hampering investors’ ability to consistently evaluate ESG performance across their PE portfolios. These challenges come through in a survey of LPs conducted jointly by Bain and the Institutional Limited Partners Association (ILPA). About 70% of LPs have made ESG a part of their investment policies. Of those, around 85% have a specific ESG policy related to private equity allocations, and those policies affect about 76% of their private equity assets under management. A full 93% said they would walk away from an investment if it posed an ESG concern.

Capturing software’s next wave of growth 
Private equity investors closed $284 billion in tech deals in 2021, 90% of which were software deals. Investor appetite for B2B software and technology is only increasing as the performance of these investments speaks for itself. While fast-growing technology companies are typically associated with higher risk, the mature or maturing enterprise software companies private equity has gravitated toward have actually turned out to be less risky and volatile than other investments. Software has outperformed other private equity investments, with about 60% of deals returning 2.5 times or greater, and with fewer write-offs than other sectors.

PE’s inflation challenge 
One new factor reared its head during 2021: inflation, which increased to levels not seen in the US and other markets in 40 years. However, as transitory this inflationary period may be, the reaction from the Federal Reserve and other central bankers will shape current and future dealmaking. One thing is for certain: There are now inflation playbooks developing across the GP and LP landscape as investors race to protect margins and future returns.

The report also examines the impact of the rising volume in growth equity assets under management, the increasing importance of sector specialization and best practices in technology due diligence.