Private Equity Fundraising, Dealmaking, and Value Creation Trends in 2024

Private equity investors have entered 2024 with roughly $2.5 trillion in dry powder available for buyouts, juxtaposed by an unprecedented backlog of unexited portfolio companies clogging the fundraising flywheel. While optimism surrounding stabilizing inflation and interest rates is expected to kickstart dealmaking in 2024, many trends from 2023 will persist into the new year.

High interest rates and expensive credit will remain the standard investment backdrop, requiring innovative deal structuring. Further, value creation — through both growth and margin expansion — will prove paramount to justify both entry costs for new deals and achieve target returns for overpriced assets acquired during the peak of the market.

Interest Rate Stabilization, Dry Powder, and Creativity Will Shape PE Dealmaking Activity

In 2024, the confluence of several factors paints a particularly intriguing landscape for PE dealmaking. For one, the sheer amount of dry powder allocated to buyout funds waiting to be deployed will likely manifest in a pick-up of deal activity. Further, peak interest rates are seemingly in sight, and many investors are slowly accepting that 2021 pricing is not coming back, which could start to move the needle on dislocated bid-ask spreads.

This said, many investors will roll over their highest-quality assets into continuation vehicles, with the hopes of capitalizing on favorable valuations when market conditions improve, and despite a reduction in overall market uncertainty, the trajectory of macroeconomic conditions ultimately remains open-ended. Consequently, private equity investors will likely continue employing many of the innovative financing strategies that characterized the dealmaking landscape in 2023.

Deal Structuring

Limited access to affordable debt means the larger equity contributions of 2023 are most likely here to stay in the short term, which requires investors to get more comfortable with asset quality and value creation opportunities.

Financing creativity will also likely bleed into 2024 as complex structures, such as performance-based earnouts, deferred payments, and large rollover investments, are tapped to bridge the buyer-seller gap, among others.

What Buyout Deals Will Get Done in 2024?

Take-Privates

While the S&P 500 Index returned more than 26.3% in 2023, this rebound was almost entirely led by the ‘magnificent seven’ of big tech stocks. As a result, private equity firms will likely continue purposefully scouring the public markets for deals. Innovative financing solutions available via private credit will also contribute to the appeal of take-private transactions.

Carve-Outs

Carve-outs will compose a strong portion of private equity dealmaking activity this year — both on the buy and sell side — as investors look to capitalize on the easier financing structures and trim underperforming units of their portfolio companies to concentrate on core strategies or generate cash for debt paydown or fund add-ons.

Add-Ons

Add-ons will play an instrumental in keeping PE deal activity spinning amid tight credit conditions. The smaller size of these deals, coupled with existing credit lines from the platform acquirers, makes them easier to finance and offers a narrower pricing gap.

Stalled Exit Velocity Will Pose Fundraising Conundrums for Buyout Shops

Buyout firms can likely expect a lean fundraising environment in 2024, as their path to securing new commitments remains hampered by a sluggish exit environment that has left LPs without the distributions necessary to fund new commitments at the pace and size of recent years. Buyout funds alone are sitting on a record $2.8 trillion in unexited assets — over four times the level held during the global financial crisis.

While anticipated interest rate and inflation stabilization could help bridge the buyer-selling pricing gap — igniting the dealmaking flywheel and returning capital to LPs — a fully recovered buyout fundraising landscape akin to pre-pandemic years is unlikely.

This year, buyout managers can expect LPs to conduct more thorough due diligence, demanding detailed financial and qualitative data to understand their ability to navigate a high interest environment. As a result, technology infrastructure and data availability become paramount for private equity investors crafting compelling narratives on their past performance on executing against their investment thesis across multiple macroeconomic cycles.

The New Math of Leveraged Buyout Value Creation

The decade-plus tailwind from accommodative monetary policy following the Global Financial Crisis has been replaced by an investment backdrop of rising interest rates, inflation, and slower growth, creating strong headwinds for value creation in buyout portfolios on several fronts.

Higher debt costs place downward pressure on cash flows for leveraged portfolio companies, potentially challenging investors’ debt paydown targets and cash flow management. Concurrently, rising labor and material costs coupled with slower growth have challenged the ability to effectively drive EBITDA growth that outpaces inflation. Together, these factors challenge buyout managers who have been tapping leverage and multiple expansion as value creation levers.

In 2024, private equity firms must prioritize operational efficiency and EBITDA growth to combat the obstacles to margin compression and cash flow management posed by the new interest rate regime. This new value creation reality holds especially true for those who paid high multiples for assets at the height of the market and financed those deals with a high quantum of leverage.

From assessing marketing budgets and sales strategies to raw material procurement and logistics, private equity investors will need to scrutinize all aspects of operations to thread the needle of driving growth while managing costs and optimizing unit economics.

This effort will require a hands-on approach that can be best serviced with advanced technology. With all portfolio company data aggregated in a centralized platform, firms can accurately and efficiently understand costs across their portfolio and identify strategic mechanisms for reducing expenses without hurting top line growth.

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