Private equity: sector reaches stability, but volume of dry powder remains significant

The steep decline in the volume of deals over the past two years stabilized at the beginning of 2024 and buyout funds appear to be on track to end the year on a stable note compared to 2023. On the other hand, most funds are still struggling to raise new capital, indicates the latest global Private Equity report from Bain & Company. 

Despite 2024 presenting deals with values close to those of pre-pandemic years, the volume of accumulated dry powder currently stands far above historical standards. The deal values this year are expected to correspond approximately to the total of 2018, but the volume of available dry powder is more than 150% higher than it was at that time. 

Bain & Company interviewed over 1,400 market players to find out when they expected the activity to recover. About 30% said they do not see signs of recovery until the fourth quarter and 38% predicted that it would take until 2025 or later. However, the consultancy's informal discussions with general partners (GP) around the world suggest that negotiation channels are already beginning to be reestablished and many see signs of recovery in the sector.

“The PE industry seems to have already passed its worst moment. It is expected that the volume of transactions for 2024 will be equivalent to or higher than 2023, and we have a significant amount of dry powder available. The challenge now is to obtain more exits so that investors can recapitalize and participate in new funds, which has been happening in a limited way due to the low amounts distributed for realized capital (DPI). Finding ways to generate DPI strategically across the portfolio is becoming a point of competitive differentiation,” says Gustavo Camargo, partner and leader of the Private Equity practice at Bain in South America.

Investments --- If you have any specific context or additional text related to investments that you would like translated, please provide more details. This will help ensure the translation is as accurate and relevant as possible.

Bain projects that the global value of deals should close the year at US$1.452 trillion, an increase of 181% compared to the US$1.442 trillion recorded in 2023. However, the gain is attributable to a higher average deal value (which increased from US$1.758 billion to US$1.916 billion), and not to more deals. As of May 15, the volume of deals fell globally by 41% on an annualized basis compared to 2023. The market is still getting used to the fact that interest rates may remain higher for longer and that valuations obtained in a much more favorable fiscal environment will ultimately have to be adjusted.

Outputs

The pressure on the exits is even greater. The total number of exits supported by acquisitions is essentially stable on an annualized basis, while the value of exits tends to end at US$143.6 billion, an increase of 17.1% compared to the total of 2023. A positive figure, but one that still positions 2024 as the second worst year in terms of exit value since 2016.

One point of optimism is the reopening of the initial public offering (IPO) market, triggered by the rise in stocks over the past six months, but the overall slowdown in exits is making life more complicated for GPs. An analysis of the fund series of the 25 largest acquisition companies shows that the number of companies in the portfolios has doubled over the last decade, while high interest rates have increased the risks of holding an asset for longer. 

Each day of waiting leads to important questions: is it worth the risk of alienating the LPs, who are increasingly eager for distributions, in pursuit of the next multiple increase? How can this affect the relationship and the ability to raise the next fund?

Fundraising

For the industry at large, and especially in the area of acquisitions, the number of closed funds continues to drop precipitously as LPs concentrate new commitments on an ever-smaller band of fund managers. In acquisitions, the 10 largest closed funds absorbed 641B USD of the total capital raised, and the largest one (the EQT X fund of 121B USD) accounted for 24B USD of that total. Today, at least one in every five acquisition fund is closing below its target and it is common for funds to miss these goals by more than 201B USD.

Furthermore, fundraising does not recover immediately when outflows and distributions improve. It usually takes 12 months or more for an increase in outflows to produce a turnaround in fundraising totals. This means that even if negotiations are resumed this year, it could take until 2026 for this sector to truly improve.

To adapt to the current environment, Bain & Company recommends four steps that will help understand how LPs really view your fund and translate these insights into stronger performance and more competitive market positioning.

Evaluation: clearly identify how the fund presents itself to the market ‒ not what LPs say, but what they really think. To understand what needs to be adjusted, it is essential to obtain accurate insights into what truly matters to strategic investors when choosing a fund.

Portfolio: analyze where the value lies within your portfolio and evaluate how individual actions add up ‒ and whether the whole is meeting the specific metrics that LPs value. It is also critical to implement the correct governance to make decisions regarding the timing of exit or the allocation of resources.

Value Creation: for better or for worse, the expansion of multiples has been a key factor in performance for years. However, in a high-rate environment, the focus becomes profit margin and revenue growth. Resources to drive performance, effective portfolio monitoring, and governance are also critical to creating value holistically and making decisions that balance the best interests of the company as a whole.

Investor Relations: Develop the right commercial movements to sell your narrative. This means segmenting the market by "customer," determining levels of commitment, and devising targeted strategies. A good renewal rate is around 75%, so even for the top funds, there is almost always a gap to fill and the need to win new LPs. 

The priority in the current market is to demonstrate to LPs that your company is a responsible manager, with a disciplined and rational plan to generate returns and distribute capital on time. There is no reason to expect that the market will become easier with the return of private capital. The fundraising for the next fund depends on a plan to become more competitive and prove this to investors now.