Bain & Company says private equity should see rise in dealmaking in 2024
The global private equity industry in 2023 suffered its worst slump since the financial crisis 15 years ago, but there are signs it is bouncing back.
A new analysis from Bain & Company reveals that, despite continued challenges, the industry is poised for a rise in dealmaking in the months ahead.
Investor confidence tumbled last year as buyout investment value dropped by 37% year-over-year to US$438 billion, the worst total since 2016, to end the year 60% below 2021’s peak. Deal count was down 35% and exits value were down by two-thirds (66%) compared to 2021.
But activity is ticking upwards and dealmaking is expected to improve even if the Fed is hesitant on rate cuts, but assuming that no further macro shocks emerge. There is significant dry powder to fuel this rise, with $1.2 trillion held by buyout funds alone. More than a quarter of this capital has been sitting there for at least four years.
Hugh MacArthur, chairman of the global Private Equity practice at Bain & Company, says the improvement in the deal market at the start of this year means the firm is cautiously optimistic over prospects.
“The sheer scale and speed of rate rises last year, and the uncertainty around that, was a shock for the industry in 2023,” he said. “But the outlook remains sound. With rates set to moderate in coming months there’s a greater sense of stability. Coupled with the incentives to put the record mountain of dry powder to work, we expect GPs to come off the sidelines. But passively waiting for conditions to recover is not a viable strategy.”
Headwinds for PE
However, there are potential issues with revival prospects, not least anxieties over recession risks despite robust US growth, with record-low unemployment and strong equity markets.
A critical challenge is that exit markets are frozen, with GPs sitting on $3.2 trillion in unsold assets and 46% of this being at least four years old, the highest in more than a decade. Globally, buyout-based exits dropped 44% in the last year to $345 billion by value, and the number of exit transactions fell by 24% to 1,067.
“The exit conundrum is now really critical to fix as the market improves – the current threat to investor cash flows and the sector’s liquidity is very real,” Rebecca Burack, head of the global Private Equity practice at Bain & Company. “Breaking the logjam will need GPs to take charge of their destiny in terms of how they can manage portfolios in order to generate increased distributions for LPs.”
The secondaries market saw strong growth in 2023 although is a small part of the industry. Breaking the exits logjam is vital for the resurgence of the wider PE industry.
“Getting unstuck demands action in several directions. What’s critical is demonstrating to LP investors that your firm is a responsible steward of capital with a disciplined, unemotional plan to break the gridlock. Cash is clearly king now in private capital – and it needs to be a top priority,” Burack added.
Bain & Company expects AI to have a transformative impact on private equity with utilizing its power to source deals among its potential key uses for the industry.
