Dealmaking, fundraising and exit activity are all heading in the right direction, says Chief Investment Officer Michael Mowlem
As we enter the final quarter of 2024, it’s worth pausing to take stock of developments in the private equity market this year so far, because there are indications that a cautious recovery appears to be gaining ground. After a shaky start, when deal activity and fundraising were still suffering from the after-effects of a challenging 2023, today there are signs that the industry is slowly turning the corner, with deal-making rebounding, fundraising picking up and the outlook for exits also improving.
Deal-making bounces back
The summer period was busy on the deal front in Europe, with 263 transactions completed in July and 248 in June, according to Real Deals. Despite the usual lull in August, when the holiday period saw the number of transactions dip to 189, European market activity by volume in 2024 looks set to outstrip 2023’s level, being 11% higher at the end of August than year-to-date last year. By aggregate deal value, 2024 already puts 2023 in the shade, having exceeded its year- end totals after just eight months, at just shy of the €205 billion mark1.
All of this suggests that confidence is returning and pent-up demand - as the market waited for inflation to calm down, clarity over interest rates and a narrowing of the divide between buyers’ and sellers’ views on fair value - is starting to be released. The biggest beneficiary of rising transaction volumes so far has been the consumer goods and the technology, media and telecoms industries, while the business services sector remains a key area of focus.
Take-private deals are also coming to the fore, providing investors with an exciting additional avenue of opportunity (something we have been able to source for our own client network). The number of such deals announced by private equity firms globally in the second quarter was twice that of deal volumes in Q1 (and worth over $100 billion in total), figures from EY show2. With valuations in parts of the stock market looking appealing compared to historic levels, there is plenty of scope for private equity firms to drive business transformation and create real value.
Fundraising and exits on the up
Fundraising is also seeing something of a resurgence. Data from Preqin3 indicate that by the beginning of September, European fund managers had already closed 80 buyout funds – the same number as in the whole of 2023, while the amount of capital raised in commitments in the year to date is also looking healthy. After 12-18 months or so when several fund managers have been struggling to secure their target level of commitments, this should start to add momentum to the upward trend in deal activity as capital deployment gets underway.
Exit activity has been suppressed for some time, as many would-be sellers chose to hold onto key assets for longer in order to achieve optimal valuations, while the turbulent macroeconomic climate and the mismatch in pricing expectations between buyers and sellers put the brakes on negotiations.
Now it looks like more exits are coming to fruition once again, as pressure to deploy dry powder and new capital commitments intensifies, the outlook for inflation and interest rates settles down, thereby increasing debt capacity from banks and debt funds and pricing overall appears to be becoming more attractive. Analysis by EY shows a 43% increase in the value of exits announced globally in Q2 compared to Q1 ($113 billion, up from $79 billion)4.
Positive momentum
The private equity industry has weathered tough times before and it has demonstrated real resilience in the face of recent challenges and the rise in inflation is a macro-factor not seen as a major factor in the industry’s rise before. Notably, it has adapted to the changing environment by extending hold periods for portfolio companies (the average for European funds hit seven years last year, before dropping back to 5.8 years in the first half of this year5) and by leveraging private credit to achieve more flexibility in their financing arrangements. The sector is also adept at finding opportunities wherever they exist, such as in high growth sectors like technology and artificial intelligence (AI).
Key industry indicators are moving in the right direction. Sentiment is upbeat, with surveys showing a majority of private equity professionals expecting activity to increase as the year goes on6 being borne out by the reality in the ground. With confidence increasing and capital flowing more freely again, this year looks set to end on a positive note.