Private Equity
Market Snapshot
March 2024
The term “green shoots” can be heard every time a slow deal market shows any signs of life, but as we enter spring there are indications that private equity activity is starting to pick up.
More European IPO Action?
Following U.S. listings in January of KKR-backed health services company BrightSpring and Finnish sporting goods group Amer Sports, sponsors have begun to test European IPO markets.
In early February, Triton-owned German tank manufacturer Renk successfully listed in Frankfurt, increasing the size of its float after strong demand from investors1. By the end of its first week of trading, Renk’s share price was up some 12%. The larger listing of Athens Airport — launched by the Greek government and a consortium of private shareholders — was also well received, marking the country’s biggest IPO in more than two decades2.
It seems likely that more previously paused IPOs will follow. EQT is reported to be resurrecting plans for a Swiss listing of Galderma, its dermatology business spun out of Nestle in 2019, with a potential valuation of $20bn.
While small, this sample of IPOs might also point to emerging trends in the capital markets landscape in Europe post-Brexit. With continental companies preferring to list domestically and British businesses (such as semiconductor maker Arm) showing a preference for the U.S., the UK’s Financial Conduct Authority is reported to have said that it is moving with the “pace and precision” of a Formula One team to reform the UK listings regime to make it more attractive to corporates3. However, in the meantime, high-profile names still appear to be looking at deeper markets. After talks to list in London, Chinese fashion brand Shein is said to have asked for Chinese regulatory approval to float in the U.S., notwithstanding the fragile geopolitical environment, although the company has reportedly pitched the UK as an alternative destination if it is unable to list in the U.S.4.
We expect the market for UK IPOs to remain relatively challenged in the near term, with sponsors putting greater focus on auctioning assets or seeking favorable bilateral terms. Indeed, the downbeat performance of the UK listed company sector continues to create attractive acquisition targets for private equity investors (U.S. activist investor Elliot’s interest in Currys being one example, albeit that Elliot has now walked away) and 2024 is showing signs that it could be another strong year for P2Ps.
Demand for Dividends Recaps
Pressure has increased on private equity firms to secure full divestments, in part due to investors’ liquidity demands, as well as the approaching end of life of funds raised and invested in the pre-COVID-19 period. There remains an appetite for other ways to generate liquidity and, with the improvements in debt markets, there is an opportunity to do so while retaining control of strongly performing companies for which the timing of a full exit has yet to become optimal.
U.S. companies — the majority backed by private equity — borrowed $8.1bn in January to make dividend payments to shareholders, the highest level in over two years, according to PitchBook LCD data cited in the Financial Times5. Falling U.S. borrowing rates in expectation of lower interest rates are encouraging sponsors to lock in financing at more favorable terms.
While there is always demand to pursue dividend recaps in Europe, the economic backdrop is more complex and this may create some lag to that demand. The UK in particular is expected to have the highest level of inflation in the G7 in 2024 and 2025, potentially maintaining pressure for higher interest rates and weighing on borrowing6.
Demand for Dividends Recaps
Pressure has increased on private equity firms to secure full divestments, in part due to investors’ liquidity demands, as well as the approaching end of life of funds raised and invested in the pre-COVID-19 period. There remains an appetite for other ways to generate liquidity and, with the improvements in debt markets, there is an opportunity to do so while retaining control of strongly performing companies for which the timing of a full exit has yet to become optimal.
U.S. companies — the majority backed by private equity — borrowed $8.1bn in January to make dividend payments to shareholders, the highest level in over two years, according to PitchBook LCD data cited in the Financial Times5. Falling U.S. borrowing rates in expectation of lower interest rates are encouraging sponsors to lock in financing at more favorable terms.
While there is always demand to pursue dividend recaps in Europe, the economic backdrop is more complex and this may create some lag to that demand. The UK in particular is expected to have the highest level of inflation in the G7 in 2024 and 2025, potentially maintaining pressure for higher interest rates and weighing on borrowing6.
Financial Services and Private Equity in Focus as UK Election Nears
The UK macro environment also remains poised in light of the yet-to-be-announced general election. The Labour Party, over 20 percentage points ahead in IPSOS polling at the end of January, released a report in which it vowed to “unashamedly champion” UK financial services. While the sentiment for the broad sector is clear, the position for private equity is more uncertain. Shadow Chancellor Rachel Reeves has stated her intention to end the preferential tax treatment of carried interest as capital gains. However, other party officials are said to be concerned about the potential impact on investment, opening the possibility of a compromise on taxation levels7.
There are still many unknowns at play in the UK political environment. Nonetheless, the prevailing focus appears on reinvigorating the UK economy, with private capital investment viewed as part of the solution.
Financial Services and Private Equity in Focus as UK Election Nears
The UK macro environment also remains poised in light of the yet-to-be-announced general election. The Labour Party, over 20 percentage points ahead in IPSOS polling at the end of January, released a report in which it vowed to “unashamedly champion” UK financial services. While the sentiment for the broad sector is clear, the position for private equity is more uncertain. Shadow Chancellor Rachel Reeves has stated her intention to end the preferential tax treatment of carried interest as capital gains. However, other party officials are said to be concerned about the potential impact on investment, opening the possibility of a compromise on taxation levels7.
There are still many unknowns at play in the UK political environment. Nonetheless, the prevailing focus appears on reinvigorating the UK economy, with private capital investment viewed as part of the solution.
Sellers Restart Sales Processes as Prices Stabilize
The primary drivers of dampened activity during 2023 appear to have moderated. Private equity buyers and sellers are coming to terms with the uncertainty that remains and appear to be increasingly reaching consensus on pricing levels. We see a number of assets coming back to market after sale preparations were halted last year, as well as a number of new assets for which 2024 may be the year to seek an exit.
Not every asset in the preparation phase now is certain to hit the market. We expect a gradual uptick and a degree of caution rather than an unbridled wave of divestments and investments. But 2024 — particularly the second half — could be the year when it pays to be ready to capitalize on opportunities.
Disposal preparations frequently have the effect of flushing out motivated private equity acquirers, often resulting in pre-emptive bids and bilateral deals. In an interview with the Financial Times, Blackstone president Jon Gray highlighted the firm’s desire to invest capital before a broader market recovery drives up asset prices once more8. Data from Argos Wityu’s Argos Index shows that mid-market acquisition prices stabilized at 9x EBITDA in the fourth quarter of 2023, potentially indicating a bottoming of pricing levels9.
Sellers Restart Sales Processes as Prices Stabilize
The primary drivers of dampened activity during 2023 appear to have moderated. Private equity buyers and sellers are coming to terms with the uncertainty that remains and appear to be increasingly reaching consensus on pricing levels. We see a number of assets coming back to market after sale preparations were halted last year, as well as a number of new assets for which 2024 may be the year to seek an exit.
Not every asset in the preparation phase now is certain to hit the market. We expect a gradual uptick and a degree of caution rather than an unbridled wave of divestments and investments. But 2024 — particularly the second half — could be the year when it pays to be ready to capitalize on opportunities.
Disposal preparations frequently have the effect of flushing out motivated private equity acquirers, often resulting in pre-emptive bids and bilateral deals. In an interview with the Financial Times, Blackstone president Jon Gray highlighted the firm’s desire to invest capital before a broader market recovery drives up asset prices once more8. Data from Argos Wityu’s Argos Index shows that mid-market acquisition prices stabilized at 9x EBITDA in the fourth quarter of 2023, potentially indicating a bottoming of pricing levels9.
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