The global private equity (PE) sector is beginning to find stability after a two-year decline, according to Bain & Company’s 2024 Private Equity Midyear Report. However, the industry remains subdued, with momentum still elusive as it navigates a challenging environment.
Bain & Company’s analysis reveals that while the steep decline in PE deal-making and exits has largely levelled off, the sector’s activity remains muted compared to historical standards. The report highlights that the global buyout deal count through mid-May 2024 was down 4% annually compared to 2023, indicating that the year may close with a flat performance relative to the previous year. The total value of buyout deals is projected to reach $521 billion, representing an 18% increase from 2023’s $442 billion, driven primarily by a rise in average deal size rather than an increase in the number of deals.
Exits, which had been in sharp decline over the past two years, have also stabilised. The total number of buyout-backed exits is expected to remain flat on an annualised basis, while exit values are projected to reach $361 billion, a 17% increase from 2023. Despite this improvement, 2024 is still shaping up to be the second-worst year for PE exit values since 2016.
“As we progress through 2024, we are seeing encouraging signs of recovery in the private equity sector. The data and market signals suggest a positive shift, indicating that we may be at a crucial juncture where dealmaking and overall activity are gaining momentum,” commented Gregory Garnier, regional head of private equity and sovereign wealth fund practices at Bain & Company Middle East.
“However, the industry faces several significant challenges, including managing interest rates, enhancing value creation, and addressing the backlog of exits. This year will be pivotal as general partners focus on overcoming these hurdles and reinvigorating the flow of capital to limited partners.”
Emerging Signs of Recovery
Bain & Company’s report notes that informal discussions with general partners (GPs) globally suggest early signs of recovery, with deal pipelines beginning to refill. GPs observe “green shoots” of a potential recovery, marking a shift from the sentiment in Bain’s March 2024 survey of 1,400 PE market participants. At that time, 30% of respondents did not expect a resurgence in deal-making until the fourth quarter of 2024, with nearly 40% anticipating a longer timeline extending into 2025 or beyond.
However, Bain cautions that it is premature to assume a return to pre-pandemic normalcy. The firm emphasises the need for PE players to adapt to a “new normal” characterised by ongoing challenges, including high interest rates, geopolitical uncertainties, and a backlog of exits.
“The imperative is to adjust to the ‘new normal’,” said Hugh MacArthur, chairman of the global Private Equity practice at Bain & Company. “It typically takes 12 months or more for a boost in exits to produce a turnaround in fund-raising – so even if dealmaking picks up this year it could take until 2026 before the fundraising environment really improves.
“So in a hotly competitive market for capital, PE firms needs to make decisive moves to change the narrative. They need to use this time to take a clear look in the mirror and understand how LPs really see their fund and then to translate those insights into stronger performance and more competitive positioning. Importantly, that includes sharpening value creation – in an environment of higher rates the premium is going to be on producing margin and revenue growth in portfolio businesses.”
Exits gridlock and fundraising struggles
One of the most pressing issues facing the PE industry is the continued stagnation in exits. The low level of exits has resulted in PE firms holding onto unsold and ageing assets, which has led to increasing pressure on GPs. The prolonged slump in exits has hindered the return of capital to limited partners (LPs), who are becoming increasingly dissatisfied with current levels of distributed-to-paid-in capital (DPI). This dissatisfaction is further complicating the fundraising environment, as LPs concentrate new commitments on a narrower range of favoured funds.
Through mid-May 2024, the industry raised $422 billion, down slightly from $438 billion during the same period in 2023. Bain projects that fundraising will reach $1.1 trillion for the year, marking a 15% decline from the previous year. Despite the overall robustness of fundraising figures, the concentration of capital among the largest funds highlights a growing disparity within the industry. The 10 largest buyout funds have accounted for 64% of total capital raised so far this year, with the largest single fund, EQT X, raising $24 billion or 12% of the total.
The report also points to a revival of the initial public offering (IPO) market as a positive development for exit prospects. Over the past six months, the resurgence in public equities has led to several large exits in Europe, providing some relief to LPs. However, Bain notes that the IPO exit channel remains a small portion of overall exit activity, with corporate deals and sponsor-to-sponsor exits still largely flat.
“The current stagnation in private equity exits is putting significant pressure on the industry to return capital to investors,” noted Elif Koc, Partner at Bain & Company Middle East. “As limited partners demand more liquidity, private equity firms must focus on navigating this challenge to secure new capital and manage existing assets effectively.”
Operational challenges amid high interest rates
The macroeconomic environment continues to present significant challenges for the PE sector. Elevated global interest rates, which are expected to remain high, are keeping dealmakers cautious and are exacerbating operational issues within existing portfolios. The increased cost of debt, financed by adjustable-rate loans, is putting pressure on balance sheets, leading portfolio managers to spend more time negotiating with lenders and managing operational challenges. This has, in turn, acted as a brake on new deal-making activity.
In light of these challenges, Bain & Company advocates for PE firms to take decisive action to better understand the expectations and needs of their LP investors. The report emphasises the importance of developing comprehensive plans across portfolios to meet these requirements and deliver value. As the industry continues to navigate this challenging environment, firms must focus on enhancing value creation and adapting to the evolving landscape.
While the global private equity sector shows signs of stabilisation after a prolonged downturn, significant challenges remain. The industry faces persistent issues with exits, fundraising, and operational pressures, which will require strategic adjustments to navigate effectively. As the sector adjusts to a new normal, the focus will be on managing these challenges and positioning for future growth.
