Private Equity Poised for a Potential Rebound in 2024

Anticipated Easing of Interest Rates

Central banks' aggressive interest rate hikes in 2023 had a dampening effect on deal activity. However, with expectations of easing rates throughout 2024, the attractiveness of private equity transactions is poised to improve, potentially unlocking new investment opportunities within this asset class.

Record Cash Reserves Fueling Dealmaking

Private equity firms are currently sitting on a staggering US$2.59 trillion in unspent capital, representing the highest recorded level in history.[1] This "dry powder" serves as the crucial fuel for dealmaking activity, offering potential exposure to a significant pipeline of transactions in the year ahead.

Renewed Lender Interest in Financing

Following a period of cautiousness, lenders are exhibiting a renewed willingness to finance private equity transactions, particularly those with lower debt requirements Bloomberg reported in January that “Wall Street banks have started angling to refinance loans that were provided by private credit firms for deals including KKR’s buyout of French insurance broker April Group and EQT’s takeover of calibration services company Trescal.”[2]

Pressure to Exit Investments Drives Activity

Private equity firms are also keen to return invested capital to their investors after a challenging exit year in 2023. US private-equity firms, for example, bought or sold just US$871 billion in assets last year, the lowest level since 2016, according to the data provider PitchBook.[3] Globally, the number of private-equity exit transactions last quarter was near a decade low, according to the consultancy Bain & Co.[4]

Convergence in Valuations

Both buyers and sellers have adjusted their valuation expectations in 2023, narrowing the gap and facilitating deal negotiation. Certainly, the pace of transactions increased during the second half of 2023 as publicly traded securities, which provide a basis for pricing such secondary deals, stabilized and a number of large secondaries funds began to deploy more capital, pushing up bids to levels that enticed sellers to act.

Strategic Corporate Divestitures Offer Entry Points

Corporate carve-outs, where a private equity firm acquires a business sector from a large corporation, are gaining traction and present attractive investment options. These carve-outs often represent established businesses with solid fundamentals, potentially providing investors with exposure to mature, growth-oriented assets within their portfolios.

Pre-election Strategic Positioning Creates Urgency

The upcoming US presidential election in November 2024 could incentivize private equity firms to expedite sales in the first half of the year. Bloomberg reports that private-equity firms “are gaming out scenarios that would see them do much of their selling before the summer, in a bid to get ahead of any market jitters stemming” from the November vote.[5]

Conclusion

Overall, the outlook for private equity in 2024 appears cautiously optimistic. While activity may not reach the record highs of recent years, the presence of liquidity and several other key drivers suggest the potential for significant growth compared to 2023.

[1] Bloomberg

[2] Bloomberg

[3] Bloomberg

[4] Financial Times

[5] Bloomberg