December 20, 2023 (Preqin News) – Challenging lending markets and a tougher exit environment were among the headwinds facing private equity in 2023 and remain likely to determine the prospects for the asset class in the year ahead.
Economic conditions and a slow M&A market took their toll on deal-making this year. In 2023 to date, 7,699 deals with a total value of $498.6bn have been recorded by Preqin, down 19% and 33%, respectively, on full-year totals for 2022.
Yet despite what was almost universally viewed as a challenging private equity fundraising market, total capital raised for 2023 to date has reached $669.2bn from 851 funds, more than the $666.9bn raised by 1,464 funds in 2022.
The fundraising data provides some optimism entering 2024, and further hopes for a recovery are likely to center on interest rates. While they are expected to remain high, any reduced uncertainty will allow buyers and sellers to narrow pricing gaps, which could help deal flow recover in the 12 months ahead. Private equity funds currently have a record $2.1tn of dry powder.
‘Private equity is one of the alternative asset classes most impacted by the evolving economic and geopolitical landscape,’ said Cameron Joyce, SVP, Head of Private Equity, Research Insights, at Preqin in this year’s Preqin Global Report 2024: Private Equity.
‘While activity has seen steep declines from post-pandemic highs, fundraising, deal flow, and exits are back in line with longer-term trends. In particular, exit activity looks like it may be finding a firmer footing, which should allow more capital to be redeployed into new investment opportunities.’
As 2023 nears its close, Preqin News gathered the views of GPs, LPs, and advisors to assess the prospects for fundraising, deals, and performance in 2024.
On fundraising...
‘Fundraising will remain challenging in 2024, with LPs looking for managers with a proven track record and a history of returning capital. LPs are spending significantly more time on investment due diligence and asking more questions of managers. They want greater access to financial and qualitative data, and GPs need to be able to provide that in a seamless way.’
David Fowler, European Head of Fund Administration, Ogier Global
‘We remain focused on our deployment in private assets across private equity, private debt, and real assets. Both realized and expected returns and return per unit of risk in private markets really is more attractive relative to the public market's counterparts. And along with the diversification that comes from private markets and lower realized volatility, really makes the private assets a very attractive portion of the portfolio.’
Dan Bienvenue, Interim CIO, CalPERS
(Taken from: Investment Committee Meeting, November 2023)
‘We think that control-based private equity investing can likely play a bigger and more important role in helping to generate higher returns in a world where our overall expected returns have fallen. The time to be bearish on private equity is not today; rather, it was actually in late 2021 and early 2022, when we believe several growth-oriented PE investors over-deployed their capital relative to trend amidst record low rates.’
Henry H. McVey, Head of Global Macro & Asset Allocation, KKR
(Taken from: KKR Global Macro Trends: Outlook for 2024)
‘We expect private markets will remain an attractive option for investors to deploy capital in 2024 and beyond. While the macroeconomic volatility we saw this past year resulted in more capital left on the sidelines, we expect new higher-quality opportunities with favorable deal structures to emerge for investors across asset classes in the year ahead.’
Edwin Conway, Global Head of Equity Private Markets, BlackRock
(Taken from: BlackRock 2024 Private Markets Outlook)
‘We will be closely following the use of NAV loans. As a type of financing arrangement, these loans are still relatively novel and perhaps not without some level of controversy, depending on who you ask. Despite that, the acceptance of NAV loans as another tool for liquidity by high-profile private equity managers will lead to a growing acceptance across the sector.’
Tim Toska, Global Head of Private Equity, Alter Domus
‘There’s a big difference in fundraising in Europe between the billion-plus funds, with their diversified LP bases, investor relations teams, and big budgets for placement agents, and the smaller ones. It’s creating dissonance. Leverage is expensive, so value has to come from growth and historically mid-caps have had more answers on that front. But we still see more money going to large caps and established managers.’
William Barrett, Managing Partner, Reach Capital
On deals...
‘The peak of the interest rate cycle should reignite M&A and IPO markets, helping to clear the backlog of unexited assets sitting in GP portfolios. Securing exits will be the number one priority for GPs in 2024, as they strive to return cash to LPs and get fundraising moving again. An increase in deal activity, and the continued development of liquidity strategies and more creative fund finance solutions, should ease the concerns of investors.’
Tim Toska, Alter Domus
‘The main factor causing an issue is high interest rates. Investors are requesting a higher yield and, if the revenues are only moving with inflation, then the value needs to drop. There’s been a gap between what sellers have in mind and what buyers want to pay based on yield expectations of their investors, but that gap will start closing more and more because of cash management issues and refinancing requirements obliging some asset managers to sell. We’re starting to see it in the secondary market, and we will see more traction in the market as soon as there is more clarity regarding decreasing interest rates.’
Rene Paulussen, Alternatives Leader, PwC Luxembourg
‘There are several opportunities that are expected to continue in the new year. The price gap between buyers and sellers is expected to get narrower, which will be good in terms of allowing transactions to close at a fair price. At the same time, dislocation is creating opportunities, such as in distress, recapitalizations, divestitures, and take privates, but these opportunities have to be assessed very carefully as the expected alpha may not be realized.’
Zia Ul Rab Siddiqui, Acting CIO, Investments & Partnerships, The Arab Energy Fund
On performance...
‘Private equity valuations have been relatively resilient compared to public equities, in part because of the stronger emphasis on fundamental performance and a longer-term approach when marking to market. As we start to look for the recovery in private markets, the way up will likely be slower as well.
‘Furthermore, the recovery may be uneven because investor preferences for sectors and markets are changing, and those where investment is growing faster, even in relative terms, will likely benefit first.’
Angela Lai, VP, Head of APAC and Valuations, Research Insights, Preqin
‘While pricing events are far less frequent than in liquid markets, we mark our assets in our semi-liquid funds on a monthly basis and don’t believe our own assets are overvalued. Across the portfolio, 12-month sales have grown 24% whilst sustaining our EBITDA margin of around 25%, which is indicative of our investments’ ability to pass through inflation.’
Rainer Ender, Global Head of Private Equity, Schroders Capital
(Taken from: Global Private Equity Review and Outlook for 2024)
‘The return of capital from funds, especially towards their end of life, is an area of concern given the fact that many GPs are facing difficulty in monetizing their portfolio. We’d like to see GPs being much more active in GP-led secondaries and continuation funds to release funds to the LPs.’
Zia Ul Rab Siddiqui, The Arab Energy Fund
‘Are we going to see significant corrections to valuations within private markets this year? Yes. And I say that as an auditor that needs to audit the valuations. We’ve seen it in public markets and in real estate, and we will see it in private equity.’
Rene Paulussen, PwC Luxembourg
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.