Investors indicate that they were willing to hold or increase allocations to private capital in the next 12 months
The latest Preqin Quarterly Updates show challenging fundraising and deal-making conditions for fund managers across most asset classes and regions. But interest rate cuts around the world could provide a tailwind in the final quarter of 2024.
Valuations slid across asset classes, including private equity, where exit value slightly declined from $97bn in Q2 to $96bn in Q3. However, this stagnation came with an increase in volume, with exits up from 550 to 570 over the same period.
Preqin’s Investor Outlook, published in August, paints a brighter picture for alternatives managers, with LPs indicating that they were willing to hold or increase allocations to private capital, despite a higher-for-longer interest rate horizon, electoral uncertainties, and a muted exit environment.
Private equity
Global private equity fundraising fell to $134.6bn in Q3 2024, a 21.6% fall from the $171.6bn raised in Q2, and $178.0bn in Q1. This was matched by a 24% decline in funds closed, 189 funds in Q3, between quarters. However, Preqin analysis conducted for the Future of Alternatives report, published in September, forecast that fundraising would remain stagnant in 2024 and pick up as interest rates stabilize.
Despite a fall in exit value, the increase in exit volume will give fund managers confidence. Trade sales, secondary buyouts, and sales to management all saw an increase in exits, while the number of bankruptcy and restructuring deals fell from 28 in Q2 2024 to five in Q3.
Victoria Chernykh, AVP in Preqin’s Research Insights team, and lead author of the Private Equity Q3 2024: Preqin Quarterly Update, said that September’s interest rates across developed markets will positively affect private equity valuations. This should increase the number of deals and exits, particularly if interest rate cuts in developed markets continue.
Venture capital
Venture capital (VC) aggregate deal value dropped by 27.1% from $37.7bn to $27.5bn in Q3 2024 and is trending towards a five-year low. This was largely driven by a fall in VC exits in the tech sector, from 111 to 28 exits, and in healthcare, from 237 to 74 exits, between Q2 and Q3.
As fewer exits mean less capital can be distributed back to investors, the dearth of VC fundraising continues. Global fundraising fell from $30.0bn from 272 closed funds in Q2 2024 to $26.0bn by 240 funds in Q3 2024. However, like private equity, the US Federal Reserve’s 50bps interest rate cut in September should be a tailwind for VC, notes Michael Patterson, lead author of the Venture Capital Q3 2024: Preqin Quarterly Update.
‘Performance of the more recent vintages has not changed much since our analysis in the second quarter of 2024; the median net internal rate of return for 2021 remains significantly below target returns, at 2.3%,’ he continues.
Private debt
Global private debt fundraising has continued its recovery path, with the $51bn raised in Q3 the highest quarter so far this year. Private debt funds in market are also targeting $504bn, up from $456bn in December 2023 – as fund managers have sought to muscle in on the asset class to capture investor interest and capital.
Direct lending was responsible for 76% of Q3 2024 fundraising, with $39bn raised for this strategy. This was followed by special situations and mezzanine fund types.
‘A more benign macro-outlook, we may yet see a catch-up as investors look to benefit from a potential soft landing of low interest rates and low inflation,’ says RJ Joshua, Head of Private Debt and Fees in the Research Insights team and lead author of the Private Debt Q3 2024: Preqin Quarterly Update.
Hedge funds
APAC-focused hedge funds outperformed North America- and Europe-focused funds, returning 6.47% in Q3 2024. North America-focused funds returned 3.85%, while Europe-focused funds returned 2.49%. Charles McGrath, the lead author of the report, attributes the performance of APAC-focused funds in Q3 to the Chinese government’s plans to stimulate the economy in September, contributing to a rise in equities.
Equity strategies had a net return of 4.49% in Q3 2024, with value-orientated and long-bias funds, the top-performing sub-strategies, returning net returns of 5.58% and 5.54%, respectively.
Preqin’s All Hedge Funds Index has grown 10.02% in the first three quarters of 2024, above global investment-grade debt at 3.6%, but lagging global equities at 19.1%.
Charles McGrath, AVP, Research Insights, and lead author of the Hedge Funds Q3 2024: Preqin Quarterly Update, said: ‘The long-anticipated cut by the US Federal Reserve in September capped an eventful period that included a small-cap equities rally, a brief yet jarring shock as funds rushed to exit the yen carry trade, and mixed economic data that simultaneously fueled and exorcised the specter of a US recession.’
Real estate
Global real estate fundraising stalled in Q3 2024, falling by over 50% since Q2 to $20bn. This was driven by a fall in aggregate capital raised for North America-focused funds by more than 60% to $14bn.
However, there was a revived investor confidence in Europe-focused funds, with capital raised more than doubling from $2bn in Q2 2024 to $6bn in Q3 2024. Globally, there was an 11% decline in transaction value from $40bn in Q2 2024 to $35bn.
Real estate deal values in APAC and North America fell by $0.3bn and $0.5bn respectively, showing a relatively sustained momentum in the regions. Europe saw the biggest real fall in real estate deal value, from $8bn to $4.1bn from Q2 to Q3.
Read more in the Real Estate Q3 2024: Preqin Quarterly Update.
Infrastructure
Unlisted infrastructure deal value rose 55% to $101bn in Q3 2024, alongside a 21% rise in deal volume, with the asset class proving resilient amid a higher interest rate environment. Deal volume in Europe accounted for most of the rise in Q3, compensating for a slight contraction in North America.
‘Unlisted infrastructure’s resilient deals market suggests it won’t succumb to the trials seen in the real estate asset class. Despite both asset classes having the common challenge of heightened interest rates constraining capital supply, infrastructure does not face the same threats on the demand side,’ said Alex Murray, VP, Head of Real Assets, Research Insights at Preqin.
Despite a brighter deal-making environment, infrastructure fundraising fell to $15.5bn in Q3 2024, down from $19.3bn in Q2 and $36.2bn in Q1. Capital targeted has largely flattened out, with funds looking to raise $563bn in Q3, slightly up from $545bn in Q2 2024. The Infrastructure Q3 2024: Preqin Quarterly Update notes that the largest fund managers in the asset class might be delaying new launches due to fundraising concerns.
APAC
APAC-focused private debt funds raised $2.3bn in Q3 2024, more than doubling the $1.1bn raised in Q2 – largely driven by SeaTown Holding’s $1.3bn direct lending fund.
Private capital funds focused on APAC raised $13.7bn in Q3 2024, almost half the $26.1bn raised in Q2, and the lowest quarterly level for five years. South Korean-focused funds were a bright spot, accounting for $4.6bn - the highest quarterly figure since 2021, according to the APAC Q3 2024: Preqin Quarterly Update.
Despite a fall in fundraising, private equity deal volume and value climbed in APAC by 11.0% and 52.8%, respectively, in Q3. Japan led the region for exit volume, accounting for 37.2% of total exits with 45 exits in the quarter, up from 12 in Q2, and a five-year high.
Angela Lai, Head of Performance & Valuations, Research Insights at Preqin, said: ‘Japan market fundamentals remain attractive for long-term investors due to relatively less competition for assets, an improving corporate focus on shareholder returns, and what are still very low interest rates in comparison to other parts of the world.’
The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin providing the information in this content accepts no liability for any decisions taken in relation to the above.