Preparation is Key to Seizing Growing Exit Opportunities
Private equity exits had their worst year in over a decade in 2023, according to PitchBook, with global divestments coming in at $574bn, down 27% on 2022 and 66% from 2021. Europe performed only moderately better than the global trend with a 19% contraction on the prior year, and 47% versus 20211.
That slowdown had a much-publicized impact on the private equity industry and its investors. Limited distributions reduced investors’ capacity to commit to new fundraisings, spurring the use of more creative mechanisms to generate liquidity, ranging from direct secondaries and continuation funds to NAV loans. A reduced flow of exits also limited the supply of companies coming to market and thereby an important source of new investments for rival private equity firms.
As macro conditions settled in late 2023, firms across Europe began gearing up for an increase in activity. According to research released in November by Invest Europe and consultant Arthur D. Little, exit preparations were expected to be a main focus for 55% of GPs in 2024, an increase of 20 percentage points on the previous year2.
Private equity exits had their worst year in over a decade in 2023, according to PitchBook, with global divestments coming in at $574bn, down 27% on 2022 and 66% from 2021. Europe performed only moderately better than the global trend with a 19% contraction on the prior year, and 47% versus 20211.
That slowdown had a much-publicized impact on the private equity industry and its investors. Limited distributions reduced investors’ capacity to commit to new fundraisings, spurring the use of more creative mechanisms to generate liquidity, ranging from direct secondaries and continuation funds to NAV loans. A reduced flow of exits also limited the supply of companies coming to market and thereby an important source of new investments for rival private equity firms.
As macro conditions settled in late 2023, firms across Europe began gearing up for an increase in activity. According to research released in November by Invest Europe and consultant Arthur D. Little, exit preparations were expected to be a main focus for 55% of GPs in 2024, an increase of 20 percentage points on the previous year2.
Ageing Portfolios Increase Pressure to Realize Investments
The impetus to return capital to investors and revive the private equity cycle may in some cases be supplemented by fund duration issues. The average holding period for portfolio companies is at a 20-year record for North American firms – 7.1 years in 20233 – and persistently high at 5.89 years for European companies, according to Preqin data cited by S&P Global Market Intelligence4.
That means a greater risk of funds approaching the end of their 10-year lifespan with a significant proportion of assets still in the portfolio. According to PitchBook analysis, at current divestment rates, 2017 vintage funds are on track to reach maturity dates with up to a quarter of their assets unrealized5. Longer holding periods also mean companies approaching debt maturities with the prospect of refinancing debt at higher interest rates.
European IPO Expectations Trail U.S. Ambitions
IPOs have proved a valuable yet irregular exit route for sponsors. Expectations that stock market listings could regain traction in 2023 were dealt a blow by unconvincing post-IPO performance and criticisms of high listing valuations for companies. German sandals maker Birkenstock traded below its IPO price for some six weeks following its listing in October6, while U.S. online delivery business Instacart popped on going public but was more than 20% below its IPO price by mid-January.
Despite the weak environment in 2023, forecasts for a fall in interest rates and a coinciding rally in stock prices have given a boost to preparations for tech and biotech-focused companies on U.S. equity markets. In an interview at Davos, Adena Friedman, CEO of Nasdaq, said close to 100 companies had made filings to list on the exchange, with the first expected to broach the market in the first quarter, followed by a larger wave in the second quarter7. Although regulatory adjustments seek to make the London Stock Exchange more attractive to British and European-domiciled companies, it isn’t clear that any significant boost will reach UK shores and the trend of seeking listings in deeper U.S. equity markets looks set to continue for those businesses with a convincing U.S. or global growth story.
European IPO Expectations Trail
U.S. Ambitions
IPOs have proved a valuable yet irregular exit route for sponsors. Expectations that stock market listings could regain traction in 2023 were dealt a blow by unconvincing post-IPO performance and criticisms of high listing valuations for companies. German sandals maker Birkenstock traded below its IPO price for some six weeks following its listing in October6, while U.S. online delivery business Instacart popped on going public but was more than 20% below its IPO price by mid-January.
Despite the weak environment in 2023, forecasts for a fall in interest rates and a coinciding rally in stock prices have given a boost to preparations for tech and biotech-focused companies on U.S. equity markets. In an interview at Davos, Adena Friedman, CEO of Nasdaq, said close to 100 companies had made filings to list on the exchange, with the first expected to broach the market in the first quarter, followed by a larger wave in the second quarter7. Although regulatory adjustments seek to make the London Stock Exchange more attractive to British and European-domiciled companies, it isn’t clear that any significant boost will reach UK shores and the trend of seeking listings in deeper U.S. equity markets looks set to continue for those businesses with a convincing U.S. or global growth story.
Preparing Sales for Private Equity and Strategics in Europe
The majority of sponsors of European portfolio companies will be targeting sales to strategic buyers or rival private equity firms. Falling acquisition multiples indicate an adjustment of vendor pricing expectations which may facilitate more sales. The Argos Index of mid-market multiples dropped to 9.1x EBITDA in the third quarter of 2023, down from 9.9x the previous quarter, and well below the 11.6x peak recorded in 20218.
However, there are many other factors for private equity
firms to consider when readying companies for sale:
However, there are many other factors for private equity
firms to consider when readying companies for sale:
After a quiet 2023, pressure on private equity to divest mature assets and invest dry powder in new companies will continue to build in 2024. While markets are showing signs of recovery, macro and geopolitical uncertainty, not to mention the risk of unforeseen exogenous shocks, mean that volatility could remain high and exit windows narrow. However, with the right preparations, sponsors should be in a position to seize opportunities to exit and maximize value even in challenging markets.
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