Private Equity
Market Snapshot
February 2024
Private equity investment fell sharply in 2023 after two years of post-pandemic boom. Dealogic data, which includes buyouts and exits, as well as deals by private equity-owned companies, shows that overall activity fell by about 40% to $846bn last year from $1.44tn in 20221. The slowdown in the pace and volume of deployment is leaving buyout firms with unprecedented levels of dry powder – $2.59bn at the end of 2023, according to S&P Global Market Intelligence – a quarter of which is in the hands of the largest global groups, including Apollo, Blackstone, and CVC2.
However, Blackstone’s President & COO was recently quoted in the Financial Times: “The wheels of merger and acquisition activity are picking up…We’d like to [invest] more before it is a consensus view because, by the time you get there, then valuations have moved.” Indeed, kickstarting deployment in 2024 will be a central objective for private equity firms and will rely in no small part on a healthy pipeline of exits coming to market.
Private equity investment fell sharply in 2023 after two years of post-pandemic boom. Dealogic data, which includes buyouts and exits, as well as deals by private equity-owned companies, shows that overall activity fell by about 40% to $846bn last year from $1.44tn in 20221. The slowdown in the pace and volume of deployment is leaving buyout firms with unprecedented levels of dry powder – $2.59bn at the end of 2023, according to S&P Global Market Intelligence – a quarter of which is in the hands of the largest global groups, including Apollo, Blackstone, and CVC2.
However, Blackstone’s President & COO was recently quoted in the Financial Times: “The wheels of merger and acquisition activity are picking up…We’d like to [invest] more before it is a consensus view because, by the time you get there, then valuations have moved.” Indeed, kickstarting deployment in 2024 will be a central objective for private equity firms and will rely in no small part on a healthy pipeline of exits coming to market.
Political Deal Drivers Versus Geopolitical Risks
While many anticipate a gradual build-up of activity in 2024, election timetables could interfere with that outcome. Current guidance is for a UK general election in the second half, with a number of commentators pointing to November 2024. As with the U.S. presidential election, most commentators seem to believe that the most likely election outcomes are now priced in and that this is unlikely to cause a major impact on the buildup of M&A activity over the course of 2024.
Geopolitical uncertainty adds another layer of volatility to deal markets. Disruption to freight traffic in the Red Sea led to a tripling of container prices in early January3. This in turn threatens global supply chains and puts renewed upward pressure on inflation. Such unknowns have the potential to impact individual company performance and valuations, while more severe exogenous shocks could have larger repercussions for deal and financing markets.
Political Deal Drivers Versus Geopolitical Risks
While many anticipate a gradual build-up of activity in 2024, election timetables could interfere with that outcome. Current guidance is for a UK general election in the second half, with a number of commentators pointing to November 2024. As with the U.S. presidential election, most commentators seem to believe that the most likely election outcomes are now priced in and that this is unlikely to cause a major impact on the buildup of M&A activity over the course of 2024.
Geopolitical uncertainty adds another layer of volatility to deal markets. Disruption to freight traffic in the Red Sea led to a tripling of container prices in early January3. This in turn threatens global supply chains and puts renewed upward pressure on inflation. Such unknowns have the potential to impact individual company performance and valuations, while more severe exogenous shocks could have larger repercussions for deal and financing markets.
Public-to-Privates Show Opportunities in Europe’s Valuation Gap
Public-to-private transactions in the UK represented a significant portion of deal activity in 2023, with 30 firm offers last year from private equity, or more than half (51%) of such takeover approaches, according to Peel Hunt data. There are plenty of drivers for that level of activity to continue in 20244.
The end of the 2023 rally in stocks, fueled by expectations for a series of interest rate cuts, highlights the persistent disconnect between listed equity valuations in the U.S. and Europe. As of mid-January, the U.S. S&P 500 was up 19% over the 12-month period, Europe’s Stoxx 600 was just 2% higher, while the UK’s FTSE 100 was down almost 6%. Furthermore, UK companies trade well below the price/forward earnings ratios of U.S. peers and global benchmarks5. According to the manager of Allianz’s The Merchant Trust fund, investors pay £10 for every pound of profit made by UK companies, compared with $20 for every dollar of profit in the U.S6.
Public-to-Privates Show Opportunities in Europe’s Valuation Gap
Public-to-private transactions in the UK represented a significant portion of deal activity in 2023, with 30 firm offers last year from private equity, or more than half (51%) of such takeover approaches, according to Peel Hunt data. There are plenty of drivers for that level of activity to continue in 20244.
The end of the 2023 rally in stocks, fueled by expectations for a series of interest rate cuts, highlights the persistent disconnect between listed equity valuations in the U.S. and Europe. As of mid-January, the U.S. S&P 500 was up 19% over the 12-month period, Europe’s Stoxx 600 was just 2% higher, while the UK’s FTSE 100 was down almost 6%. Furthermore, UK companies trade well below the price/forward earnings ratios of U.S. peers and global benchmarks5. According to the manager of Allianz’s The Merchant Trust fund, investors pay £10 for every pound of profit made by UK companies, compared with $20 for every dollar of profit in the U.S6.
As a result of the disconnect, private equity firms are exploring take-privates across Europe. Following Silver Lake’s completion of its take-private of German software group Software AG in September, Blackstone and Permira offered to buy Norwegian classifieds group Adevinta in November for approximately €14bn including debt7. While potentially Europe’s largest deal post-COVID, prior to the offer Adevinta’s share price had weakened by some 60% from its 2021 high.
In addition to more attractive valuations, the increase in the availability of financing seen progressively throughout 2023 is expected to unlock more deals for buyout firms. Although there are still relatively few mega-transactions on the horizon, we expect to see robust mid-cap buyout activity, and believe that the conditions are conducive to an increase in take-privates in the larger buyout space above £1bn in enterprise value.
Exits May Reignite Fundraising Potential for Wider Private Equity Industry
An increase in exit activity will be critical to unlock not only new investment, but also fundraising activity. Large fundraisings dominated the landscape in 2023, as the likes of Apollo, CVC, Permira, and Warburg Pincus all raised double-digit billion-dollar funds. However, there was also clear market bifurcation. According to Preqin data, a total of $669bn had been raised by 851 funds globally by late December, compared with the $667bn raised by 1,464 funds in 20228.
More distributions across the asset class could encourage smaller and mid-market funds to return to market in 2024 and enable investors to deploy more capital in their direction, although new fund launches are likely to be more skewed to the second half of the year as the cycle of exits, fundraisings, and investments plays out.
Exits May Reignite Fundraising Potential for Wider Private Equity Industry
An increase in exit activity will be critical to unlock not only new investment, but also fundraising activity. Large fundraisings dominated the landscape in 2023, as the likes of Apollo, CVC, Permira, and Warburg Pincus all raised double-digit billion-dollar funds. However, there was also clear market bifurcation. According to Preqin data, a total of $669bn had been raised by 851 funds globally by late December, compared with the $667bn raised by 1,464 funds in 20228.
More distributions across the asset class could encourage smaller and mid-market funds to return to market in 2024 and enable investors to deploy more capital in their direction, although new fund launches are likely to be more skewed to the second half of the year as the cycle of exits, fundraisings, and investments plays out.
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