Private Equity Outlook:
Five Predictions for 2024
Economic conditions are likely to remain complex in 2024. While GDP growth in the U.S. and parts of Europe was more resilient than many expected in 2023, the delayed effect of higher interest rates is eating into investor and consumer confidence and, while there is still a chance of a “soft landing”, this could lead to some level of economic downturn. On the plus side for private equity, inflation has been dropping back towards its target and interest rates appear to have plateaued, providing more visibility and certainty than has been evident for some time. Should the environment remain largely unchanged, then this could begin to signal better conditions for private equity investment and activity could pick up again over the course of 2024.
In this article, we look at our five top expectations for private equity through the year ahead.
Improving Exit Environment Could Unlock Private Equity Activity
The difficult exit market weighed on private equity activity in 2023. According to data from Invest Europe, H1 2023 European exits were down 42% on the same period of last year and at the lowest level of the last 10 years1. Constrained divestment impacted distributions to investors, in turn hitting European fundraising which contracted by 60% year on year.
The most effective way to boost distributions will be to increase the flow of exits. Many sponsors appear to be readying more businesses for sale, with 55% of GPs surveyed by Invest Europe and consultancy Arthur D. Little indicating that exit preparations will be a main focus over the next 12 months, up 20% on the prior year2.
Although the precise timing of any uptick in exits is unclear and depends to a large extent on a general improvement in market sentiment, we believe that activity could pick up relatively quickly, given the volume of unrealized investments in portfolios. According to Bain & Co, buyout funds globally owned approximately 26,000 companies at the end of 2022, a majority of which had been held for around five years or longer, representing $2.8tn in unrealized value3. With dry powder also at record levels, it seems likely that secondary buyouts will make up the largest proportion of deal activity in 2024.
Improving Exit Environment Could Unlock Private Equity Activity
The difficult exit market weighed on private equity activity in 2023. According to data from Invest Europe, H1 2023 European exits were down 42% on the same period of last year and at the lowest level of the last 10 years1. Constrained divestment impacted distributions to investors, in turn hitting European fundraising which contracted by 60% year on year.
The most effective way to boost distributions will be to increase the flow of exits. Many sponsors appear to be readying more businesses for sale, with 55% of GPs surveyed by Invest Europe and consultancy Arthur D. Little indicating that exit preparations will be a main focus over the next 12 months, up 20% on the prior year2.
Although the precise timing of any uptick in exits is unclear and depends to a large extent on a general improvement in market sentiment, we believe that activity could pick up relatively quickly, given the volume of unrealized investments in portfolios. According to Bain & Co, buyout funds globally owned approximately 26,000 companies at the end of 2022, a majority of which had been held for around five years or longer, representing $2.8tn in unrealized value3. With dry powder also at record levels, it seems likely that secondary buyouts will make up the largest proportion of deal activity in 2024.
Buyer and Seller Price Expectations Will Converge Further
One key element to help drive increased private equity activity will be the meeting of buyer and seller price expectations. The disconnect is still evident in some deals, particularly in consumer and leisure sectors that are perceived to be most exposed to a downturn.
Buyer and Seller Price Expectations Will Converge Further
One key element to help drive increased private equity activity will be the meeting of buyer and seller price expectations. The disconnect is still evident in some deals, particularly in consumer and leisure sectors that are perceived to be most exposed to a downturn.
With interest rates expected to stay higher for longer, more expensive financing is likely to mean increased equity contributions to deals. That, in turn, will put pressure on returns forecasts and therefore drive a decrease in buy-side multiples. Although there were some variations by sector, multiples paid by sponsors for European mid-market businesses contracted sharply to 9.4x in the third quarter, falling from an average multiple of 13x in 2021, according to Argos Wityu data4. Furthermore, the number of deals concluded at multiples below 7x reached a new record at 30%, while the proportion of higher valued deals over 15x receded. There may also be further for valuations to fall as some 90% of GPs and LPs surveyed by Invest Europe and Arthur D. Little expect multiples to be the same or lower over the coming year5.
Public Markets Will Yield Investment Opportunities But Will Be Out of Favor for Exits
In a year that was relatively weak for investments, take-privates accounted for some of the largest deals. In November, Blackstone and Permira made an offer for listed Norwegian online classifieds company Adevinta that valued the business at €14bn. While not a formally recommended offer, Adevinta’s board said the cash consideration was “within the range of what is fair”, paving the way for acceptance of a deal6.
Although noted as a likely trend in our 2023 Roundup, take-private activity perhaps did not take off as fully as sponsors had expected in 2023, particularly in the UK. However, private equity firms – both European and international – are finding interesting opportunities on exchanges across the continent. In some cases, these are companies that were previously owned by private equity, and which now publicly trade at levels which firms (including sometimes their former owners) believe to be below intrinsic value. While public-to-private transactions remain complex, boards and other investors may be more open to deals given long-term interest rate expectations and the ongoing threat of economic uncertainty.
On the other side of the coin, mixed performance from companies listed by private equity and venture capital in the Autumn window will weigh on new IPO potential. Among those names, British chipmaker ARM (which elected to list in the U.S.) is trading well above its listing price, while German sandals company Birkenstock, as well as North American tech companies Klaviyo and Instacart, are at or below their IPO prices. Sporadically open IPO markets may provide some exit options for companies in 2024, particularly those with a strategic U.S. angle, but we expect most European private equity firms to seek private exits to other firms or trade buyers or to explore the secondaries markets.
Firms Will Continue to Seek Creative Ways to Access Liquidity
With exit markets severely constrained in 2023, private equity firms explored NAV loans and other mechanisms to raise capital against their long-held investments. Criticism was raised about the use of such loans to fund distributions to investors, including by private equity industry figures themselves. Thoma Bravo managing partner Holden Spaht argued in the Financial Times that unless those funds are used to improve private equity-owned businesses in the portfolio, the fund investors will suffer when those high-interest NAV loans fall due7.
We expect private equity firms to access these and other creative approaches to raise capital and support companies in 2024. The CEO of EQT highlighted the potential for private stock sales to its large base of over 1,000 LPs as a means to monetize its investments8. Firms are also looking at the potential to sell minority stakes in maturing, but not necessarily fully exit-ready assets to a narrower group of investors, or another GP. In doing so, they can prepare the ground for a future divestment by creating a partnership with a new investor who may be the ultimate acquirer.
Special situations funds will also be active in deploying preferred equity and hybrid financing for companies that require additional investment firepower, but which cannot (or choose not to) access capital from more traditional lenders and investors.
Banks Will Become More Competitive in Financing as Debt Funds Focus on Higher Quality
Debt funds have become the mainstay of the marketplace, supporting private equity sponsors with their financing needs. They show no sign of being pushed from the scene by the return of banks to leveraged lending. Indeed, given the recent challenges in syndicating exposure to buyouts, some traditional lenders see the attraction of partnering in arrangements with blind pool capital in order to make loans.
The market environment has allowed debt funds to move up the deal size spectrum, with a consortium reported to be providing a €4.5bn package for Blackstone and Permira’s proposed buyout of Adevinta9. Having built up a strong competitive position in the market, we see funds focusing on higher-quality credit, which they price keenly in order to target strong returns. The result may be less private credit available for smaller companies or those perceived to be more risky.
Continuing higher interest rates are a risk factor and have the potential to increase stress among private equity-backed companies. Fitch Ratings forecasts an increased default rate on European leveraged loans of 8.5% by the end of 2024, up from 1.7% in July 2023. That projection includes the most interest rate-sensitive sectors such as real estate but is nonetheless significantly lower than during the financial crisis10.
While debt funds have become a feature of the marketplace only since the global financial crisis and their attitudes to downside scenarios are relatively untested, we expect banks and debt funds to remain relatively clement on most refinancings, amending and extending loans where possible.
Banks Will Become More Competitive in Financing as Debt Funds Focus on Higher Quality
Debt funds have become the mainstay of the marketplace, supporting private equity sponsors with their financing needs. They show no sign of being pushed from the scene by the return of banks to leveraged lending. Indeed, given the recent challenges in syndicating exposure to buyouts, some traditional lenders see the attraction of partnering in arrangements with blind pool capital in order to make loans.
The market environment has allowed debt funds to move up the deal size spectrum, with a consortium reported to be providing a €4.5bn package for Blackstone and Permira’s proposed buyout of Adevinta9. Having built up a strong competitive position in the market, we see funds focusing on higher-quality credit, which they price keenly in order to target strong returns. The result may be less private credit available for smaller companies or those perceived to be more risky.
Continuing higher interest rates are a risk factor and have the potential to increase stress among private equity-backed companies. Fitch Ratings forecasts an increased default rate on European leveraged loans of 8.5% by the end of 2024, up from 1.7% in July 2023. That projection includes the most interest rate-sensitive sectors such as real estate but is nonetheless significantly lower than during the financial crisis10.
While debt funds have become a feature of the marketplace only since the global financial crisis and their attitudes to downside scenarios are relatively untested, we expect banks and debt funds to remain relatively clement on most refinancings, amending and extending loans where possible.
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