Global Private Equity Market Trends and Insights

As private equity investors increasingly delay the return of capital to Limited Partners (LPs), a new cycle is taking shape. This trend is causing LPs to allocate less capital to fresh private equity ventures. This shift particularly impacts fundraising efforts for both established and emerging managers. Emerging managers feel this more acutely, as their allocations from LPs are often seen as less critical. This evolving landscape may prompt a reevaluation of the industry's standard investment and harvesting timelines. The conventional private equity model of a five-year investment followed by a five-year harvesting period is being challenged. Now, we might see a new norm: five years of investing coupled with a ten-year harvesting phase. This adjustment could have significant repercussions for the fundraising market and investment strategies. Instead of the usual rapid turnover of assets, we might witness asset exchanges occurring perhaps only once every decade. Such an extended holding period for investments implies major shifts in the operational strategies of private equity funds. This includes modifications in value creation approaches, exit planning, and portfolio management. Moreover, it may affect the nature of investments pursued, with a possible inclination towards assets that offer sustainable value over these lengthier timeframes.

As we navigate through the evolving terrain of PE markets, the beginning of 2024 has underscored a critical trend: the return of exits from private equity investments remains pivotal for the market’s recovery. Despite a hopeful uptick at the end of 2023, Q1 has witnessed a 19% drop in total US PE exit value, signaling the continued slowdown. This dip is influenced by factors like high interest rates, scant deal activity, and ongoing discrepancies in pricing expectations between buyers and sellers. The ramifications for the PE industry are huge. Reduced exit activity can stifle the cycle of capital formation, as returns from exits are crucial for fueling new fundraising efforts, maintaining dry powder, and sustaining fund performance. Such downturns began shadowing the industry in 2022 and could potentially curb overall growth if they persist. It’s not all doom and gloom. Innovative liquidity solutions like secondaries funds and continuation vehicles have breathed some life into exit activities. However, traditional routes like sponsor-to-sponsor transactions have plummeted, reaching a 10-year low as investors explore exits to corporates—entities with ready capital for strategic acquisitions. As we look ahead, the shift towards continuation funds and other alternative strategies suggests a strategic adaptation within the industry, aiming to extend exit timelines and enhance liquidity for limited partners (LPs). These adjustments are not just temporary fixes but could lead to a significant transformation in how PE firms manage and exit their investments. Are we witnessing a permanent shift in the PE landscape, or is this just a strategic pivot to navigate current economic headwinds? #PrivateEquity #InvestmentTrends #MarketInsights #FinancialStrategy

Some very key insights regarding private equity in 2024 from PitchBook worth perusing: Private Equity Fundraising and Deal Activity - The largest publicly traded PE firms saw strong inflows into their funds in 2024 compared to the previous year, primarily driven by private credit strategies. - However, the weak exit environment from 2023 carried over into 2024, with sponsors underwhelming with realizations and exits for buyout funds and other core PE strategies. - Private credit strategies remained highly attractive, accounting for 69.8% of total fund inflows! - Private wealth and insurance channels were major contributors, making up an estimated 47.8% of private credit fundraising in 2023. Buyout Funds Outlook - The tailwinds that boosted buyout fund performance over the past decade are expected to subside in the coming years for large, high leverage buyouts counting on financial engineering for returns. - While buyout deal activity rebounded slightly in early 2024, it remained below historical averages and is likely to stay muted until interest rates decrease, but will remain robust in the small, middle buyout and growth equity markets where leverage is limited in use. - The continued migration by institutional investors towards independent and fundless sponsors transactions that pursue small, middle market buyout and growth strategies is expected to continue unabated. - Strong economic growth, low unemployment, and above-target inflation have shifted the Federal Reserve's focus away from lowering interest rates, which has a material impact on the buyout market. Venture Capital Sentiment - Venture capital fund managers are more optimistic about fundraising and the IPO market in the first half of 2024 compared to a year ago. - GPs expect asset valuations to become more attractive over the next month, supporting market activity albeit at subdued levels, but will negatively impact the valuation of their current holdings! - While AI remains a top focus area, some investors have expressed concerns about overinvestment in the sector. - Interest rates and the need for founders to temper valuation expectations remain key determinants of market activity. - While some managers have delayed fundraising plans or ruled out opening new funds, the majority cited no changes to their current fundraising plans. In summary, private equity fundraising saw a major boost from private credit strategies in 2024, but buyout funds continued to face challenges from the weak exit environment and high interest rates. Venture capital sentiment improved, with expectations of more attractive valuations, but concerns remained around overinvestment in AI and the impact of interest rates and valuation expectations. #privatecapital #privatemarkets #privatecredit #independentsponsor #fundlesssponsor #buyout #growth #growthequity #institutionalinvestor #sponsor #privateequity #gp #lp #familyoffice #hnw #uhnw #ria #registeredinvestmentadvisor #macroeconomic

10 takeaways from Apollo Global Management, Inc.'s 105-page report on private markets 1. Private markets are still small, comparatively With growth of $8 trillion over the past 10 years, private capital AUM growth is still far below public markets and bank balance sheets, with global equity market cap growth at $35T, bank balance sheet growth at $34T and global fixed income market growth at $42T over the same period. 2. Capital is concentrating in the hands of the 10 largest firms Across all private market segments, the largest 10 funds increased their share of capital raised. Within infrastructure, for example, the share that the largest 10 represented rose from around 30% to over 60% between 2022-May 2023 and the compared period of 2018-2021. 3. Private capital fundraising had a bad 2023 Across all but one private market strategies, 2023 represented a decline in capital raised from 2021 and 2022. The exception was secondaries which rose in 2023, though fund count fell. 4. North America increased its share of capital raised North America continued its dominance of the fundraising landscape, reflecting the depth of its manager and LP ecosystem. 5. The exit-to-investment ratio continues to decline The ratio has fallen relatively consistently from a high of around 0.55x in 2013 to 0.37x in 2023. Without distributions, re-ups are less viable for LPs. 6. As the number of PE-backed companies rises, median entry multiples also rise reflecting competition The exception was the mid-market, where multiples fell in Europe and North America to 11.4x EV / EBITDA, from a high of 14.3x in 2019. 7. Over 80% of private debt fundraising in 2023 was for funds with sizes over $1B, compared to less than 50% in 2009 8. Direct lending continues to be the dominant credit strategy, by capital raised Among the strategies that experienced the most significant declines from 2021-2023 were distressed debt, special situations and bridge financing. 9. Oil and gas fundraising has bounced back from historic lows in 2021-2022 Oil and gas represented close to 20% of all capital raised in real assets, up from sub-5% levels in 2021 and 2022 10. PE megafunds have the largest share of dry powder they’ve ever had, approaching $500B in 2023 Link below: https://lnkd.in/efuMVjk4 #privateequity #privatedebt #fundraising #capitalraising #ir #privatemarkets

Important piece from Financial Times highlighting the impact of rising rates on Private Equity performance. TLDR: heightened interest rates mean GPs can no longer rely on abundant and cheap leverage and market driven multiple expansion (beta) to drive returns.   Its incumbent upon LPs to identify the PE GPs that drive alpha through differentiated and proven value creation strategies. https://lnkd.in/e6awZw3q GSAM cites a paper from the Institute for Private Capital that lays out the drivers of private equity returns since 2000 – see photo + link below: https://lnkd.in/eFSr4TXc Cheap and abundant leverage has played an important role in driving PE returns over the last 2+ decades before interest rates started rising in January 2022 (see photo). Why do rising rates erode the equity returns benefits of leverage? Because rising rates make debt more expensive, which ripples through the markets in multiple ways. A few examples. For existing PE portfolio companies: 1) Highly leveraged PE PortCos with existing floating rate debt suddenly have much higher interest rates, decreasing cash flows and debt service coverage ratios 2) Depletion of balance sheet cash to pay interest 3) Highly punitive debt refinancing terms / costs at maturity For new private equity deals: 1) Shortage of funding: banks have pulled back on LBO financing, prompting some private lenders to step in 2) Harder for GPs to underwrite deals to clear return hurdles without benefits of cheap leverage This is all a vicious cycle and has led to fewer new deals and PE exits (often to other PE firms)... Causing to the precipitous drop in PE deal volume (photo below). Beyond leverage, there is another critical impact of higher interest rates. This is the impact on theoretical company valuations and decrease in Multiples. The historical PE value creation chart (photo below) shows how "market multiple expansion" (e.g. beta) was a key source of post-GFC returns for many GPs. Why do rising rates impact multiples? Let’s first remember what a multiple represents. An EBITDA multiple represents the ratio of a company's Total Enterprise Value (“TEV”) to Annual EBITDA. So a $1,000 million TEV company with $100 million of EBITDA has a 10x EBITDA multiple. So where do interest rates fit in? The value of an asset or investment today is the present value of expected future cash flows. As interest rates rise, the discount rate rises, which decreases the total enterprise value. As TEV declines and EBITDA remains unchanged… then the EBITDA Multiple decreases. Now all of this is theoretical. Since rates started rising in Jan 2022, public markets started seeing valuations (thus multiples) adjust down... But private market valuations have held up. Not because valuations are unchanged by rising rates... but because deals are not getting done. Sellers don't want to lock in depressed returns. Buyers don't want to pay inflated prices. What's our lesson? Find the GPs who drive alpha.

Here’s how we’re thinking about private markets right now: In #privateequity, we still like value-oriented buyout strategies and secondaries. We believe exit options for portfolio companies will improve moderately, but remain subdued, with secondary exit solu­tions becoming a more favored liquidity option. In #privatecredit, defaults have remained below both high yield bonds and leveraged loans, suggesting that experienced private debt mangers are equipped to manage through high rate and volatile markets. We continue to recommend an allocation to private credit, with a preference for managers with disciplined underwriting approaches, diversified business, sophisticated infrastructure, and a proven track record. In #realassets, the commercial real estate transaction market remains in a slump as it awaits stabilized/lower interest rates and for some of the USD 425 billion-plus in unlevered dry powder sitting in the hands of private equity to come off the sideline. We expect a bumpy ride for the multifamily sector in 2024, but believe 2025–2030 will bring opportunity in markets benefitting from strong demographics, migratory pat­terns, and job creation.   Read our latest private markets quarterly report for more.

📈 Strategic Insights for 2024: Navigating the New Normal in Private Markets and Beyond 📊 As growth leaders, understanding the broader business landscape is crucial, especially considering the evolving challenges and opportunities in private markets. A recent article from McKinsey sheds light on "Ten Considerations for Private Markets in 2024," offering valuable insights not just for private equity markets but for middle-market companies across various ownership structures. Key Considerations for 2024: 1️⃣ Normalizing Dealmaking: Expect a balanced growth in dealmaking, influenced by LP-driven pressures and higher interest rates. 2️⃣ Challenging Fundraising Environment: The 'numerator effect' continues, with fresh LP commitments constrained by valuation growth and slow PE exit velocity. 3️⃣ Concentration Among Larger Names: Larger funds may continue to attract LPs in a tight fundraising environment, limiting new-fund formation. 4️⃣ Emphasis on Value Creation: Transformative change becomes crucial for value boost, with low rates and expanding multiples no longer tailwinds. 5️⃣ Evolving Talent Challenges: The industry faces diversity, equity, and inclusion progress, alongside retention challenges in downturns. 6️⃣ Creative Sourcing: Opportunities may arise from family-owned businesses and corporate carveouts, favoring those with deep networks. 7️⃣ Infrastructure Investing Acceleration: Expanding definitions and uncorrelated returns drive increased LP exposure to infrastructure. 8️⃣ Private Credit Growth: Higher rates enhance the attractiveness of private credit, with banks limiting lending. 9️⃣ Real Estate Deal Volume Recovery: Predictability in living, working, and shopping trends may stabilize rents and encourage deal activity. 🔟 Secondaries Market Expansion: Near-record secondary fundraising could influence private markets, offering liquidity solutions for GPs and LPs. Your (and your customers') CEO, CFO, and Board are discussing these items and making decisions on them. These considerations underscore the importance of adaptability and strategic foresight for sustaining growth and achieving business objectives in the changing landscape of 2024. Remember, balance is a Verb: The concept of balance in business is dynamic, requiring continuous adjustment and alignment with evolving market conditions. This perspective is crucial for effectively managing the multitude of factors influencing company and customer decisions. 👇 For a deeper dive into these insights, see the full article linked in the first comment below. Call to Action: What market and economic trends do you believe companies need to be aware of in 2024 that may be currently under the radar? #BusinessStrategy #MarketTrends #PrivateMarkets #VentureCapital #talentmaximization #executivesearch

It is well documented that there has been a significant dip in M&A activity over the past 12-18 months, however, we have seen growth within another consulting market as a result. Value creation, especially working with Private Equity clients has seen some impressive growth but why? The function of value creation looks at how to maximize shareholder value of current corporate and business strategies, it can determine the optimal capital structure and best use for excess cash and balance business strategy with investor expectations. Private Equity firms are not seeing strong valuations on their investments due to high-interest rates (money is no longer cheap). Value creation consultants are transforming strategies away from M&A and pulling different levers to grow and make efficiency savings within portfolio companies. This strategy is in place for when the M&A market becomes more palatable and valuations start rising again and with a slightly more long-term approach PE is looking for the consultants to drive greater value on the investments. The market is expecting a flood of PE money into the market after a very subdued 2023, however, this trend could be set to continue if PE is seeing sufficient value being created by their current investments with this new value creation strategy. #valuecreation #managementconsulting #privateequity #mergersandacquisition

We’re excited to share with you our 2024 Global Private Markets Review: “Private markets: A slower era.” Our research finds 2023 was another difficult year for private markets. Macroeconomic headwinds persisted throughout the year, with rising financing costs and an uncertain growth outlook taking a toll on private markets. Full-year fundraising continued to decline from 2021’s lofty peak, weighed down by the “denominator effect” that persisted in part due to a less active deal market. Managers largely held onto assets to avoid selling in a lower-multiple environment, fueling an activity-dampening cycle in which distribution-starved limited partners (LPs) reined in new commitments. Performance in most private asset classes remained below historical averages for a second consecutive year. Decade-long tailwinds from low and falling interest rates and consistently expanding multiples seem to be things of the past. Still, recent surveys indicate that LPs remain broadly committed to private markets. In fact, the majority plan to maintain or increase allocations over the medium to long term. As private market managers look to boost performance in this new era of investing, a deeper focus on revenue growth and margin expansion will be needed now more than ever.

Private Thoughts from my Desk……………#22 We just published our annual Global Private Equity Report, and this year we call attention to one of the smallest – but most dynamic – corners of this industry…… Secondaries. Secondaries is a catchall term these days for all kind of “liquidity solutions”. Most of the capital is deployed in either traditional LP-led secondaries or GP-led continuation vehicles, which have surged in recent years to account for around half of Secondaries transaction volume today. But there are also strip sales, NAV-based lending, preferred equity solutions, etc. The industry has gotten quite creative! I mentioned that Secondaries is a smaller market………… so why care? The fact that Secondaries is small is a big reason why people should care! To give a sense of scale, with global Secondaries transaction volume of around $120B annually, the market provides only ~1% liquidity for the ~$20T AUM alternatives industry. By comparison, the US public equity markets turn over more than $200B in assets daily. Of course, most alternatives strategies are inherently illiquid. Investors can’t expect to get liquidity with the same ease as public markets. But is there a reasonable place between the current 1% private markets liquidity and public equities for investors to cash out when they need or want to……..? Demand for Secondaries would suggest that the market could indeed be much bigger. LPs feeling the current ‘liquidity squeeze’ or proactively rebalancing their portfolios are increasingly selling stakes. GPs looking to hold onto their best assets while providing LPs liquidity (and securing some DPI) are driving demand for continuation vehicles– 2024 is poised to be the biggest year ever for these transactions. And, as more private wealth comes into alternatives, investors are finding Secondaries are a great way to gain exposure. Secondary funds offer diversification, an accelerated J curve, and an attractive risk/return profile. In fact, Secondaries is the only alternatives asset class where even the bottom quartile delivers a positive return (see the chart below). Read about Secondaries and more in Bain & Company’s 2024 Global Private Equity Report here https://lnkd.in/ejheN_sf. #privateequity #privatemarkets #privatethoughtsfrommydesk