Private Equity Activity Set to Pick up in 2024
Private equity is likely to encounter an improving environment in 2024 as investors start to anticipate a decline in borrowing costs and lenders return to the market. Investors are also sitting on large amounts of cash, while valuation expectations are becoming more realistic.
Private equity faced the most challenging conditions in a decade or more in 2023 as central banks around the world continued to hike interest rates for longer and higher than most analysts had anticipated at the start of the year. Economic and geopolitical uncertainty, along with sluggish fundraising, added to the challenges facing the industry. However, there are reasons to believe that conditions should improve in 2024.
Interest rates, for example, have likely peaked in most major global economies and should begin to ease over the course of the year as inflationary pressures subside.
Record cash pile
Moreover, the huge amount of cash held by investors augurs well for dealmaking. S&P Global Market Intelligence, for example, reported that private-equity firms were sitting on a record US$2.59 trillion in cash reserves available for buyouts and other investments as of December 15, 2023. S&P Global added that nearly a quarter of that cash was held by 25 of the industry’s largest groups, including Apollo Global, Blackstone, KKR, CVC Capital, and Advent International.[i]
Moreover, lenders are increasingly willing to fund private-equity transactions, particularly less risky purchases requiring relatively low levels of debt. Bloomberg reported in January that “Wall Street banks have started angling to refinance loans that were provided by private credit firms for deals including KKR’s buyout of French insurance broker April Group and EQT’s takeover of calibration services company Trescal.”[ii] Banks had largely withdrawn from financing larger private-equity deals during the period when interest rates were rising.
Heading for the exit
Many private-equity firms are also keen to return cash to investors after a challenging period for exiting holdings. US private-equity firms, for example, bought or sold just US$871 billion in assets last year, the lowest level since 2016, according to the data provider PitchBook.[iii] Globally, the number of private-equity exit transactions last quarter was near a decade low, according to the consultancy Bain & Co.[iv]
Sellers and buyers moved closer in terms of valuations over the course of 2023, a trend that could help increase the number of exits in the coming year. Certainly, the pace of transactions increased during the second half of 2023 as publicly traded securities, which provide a basis for pricing such secondary deals, stabilized and a number of large secondaries funds began to deploy more capital, pushing up bids to levels that enticed sellers to act.
Private-equity groups have also deployed creative financial engineering tactics to bridge any remaining gaps between what buyers will pay for a company and what owners will accept. These include the use of “structured transactions”—deals that feature equity with debt-like characteristics. Other solutions include performance-based earn-outs (where sellers receive extra cash if a business exceeds expectations), deferred payments from buyers, and large rollover investments from sellers.
Corporate carve-outs, in which a private-equity firm buys a business sector from a large corporation, are also increasingly popular.
The US presidential election in November 2024 could provide further impetus for firms to carry out sales in the first half of the year. Bloomberg reports that private-equity firms “are gaming out scenarios that would see them do much of their selling before the summer, in a bid to get ahead of any market jitters stemming” from the November vote.[v]
Overall, prospects for the market in 2024 appear increasingly positive. The market certainly doesn’t lack liquidity, and while transactions may remain below the bumper levels seen in the recent past, activity could pick up significantly over that experienced last year.
Key takeaways
The prospect that interest rates have peaked and could start to ease in 2024 is likely to underpin any turnaround in private equity’s fortunes.
Private equity is sitting on record amounts of unspent investor cash and a large number of deals that firms must sell in the coming years.
Banks are also increasingly willing to fund activity following a period of retrenchment.
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