The dizzying decline in deal volume over the past two years stabilized at the beginning of 2024 and buyout funds seem to be on track to end the year steadily compared to 2023. On the other hand, most funds are still struggling to raise new capital, indicate the most recent global Private Equity report from Bain & Company.
Although 2024 presents deals with values close to those of the pre-pandemic years, the volume of dry powder accumulated currently remains well above historical standards. The deal values this year are expected to be approximately equal to the total of 2018, but the volume of dry powder available corresponds to more than 150% of what there was at that time.
Bain & Company interviewed more than 1.400 players in the market to find out when they expected 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 longer. However, informal discussions from the consultancy with general partners (GP) worldwide suggest that trading 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 transaction volume in 2024 will be equivalent to or higher than that of 2023 and we have a significant amount of dry powder available.The challenge now is to obtain more exits so that investors can capitalize again and participate in new funds, what has been occurring in a limited way due to the low amounts distributed for paid-in capital (DPI). Finding ways to strategically generate DPI across the portfolio is becoming a point of competitive differentiation, clarifies Gustavo Camargo, partner and leader of the Private Equity practice at Bain in South America
Investments
Bain projects that the total value of deals is expected to close the year at US$ 521 billion, an increase of 18% compared to the US$ 442 billion recorded in 2023. However, the gain is attributable to a higher average business value (which increased from US$ 758 million to US$ 916 million), and no more business. Until May 15, the volume of deals fell globally by 4% 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, to be adjusted
Outputs
The pressure on the outputs is even greater. The total number of exits supported by acquisitions is essentially stable on an annualized basis, while the value of outflows is expected to end at US$ 361 billion, a 17% increase compared to the total for 2023. A positive given, but still positions 2024 as the second worst year in exit value since 2016
One point of optimism is the reopening of the initial public offerings (IPOs) market, triggered by the increase in stocks over the last six months, but the general 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 in the last decade, while high interest rates have increased the risks of holding an asset for longer.
Every day of waiting leads to important questions: is it worth the risk of alienating the LPs, that are increasingly eager for distributions, in search of the next multiple increase? How can this affect the relationship and the ability to raise the next fund
Fundraising
For the industry in general, and especially in the area of acquisitions, the number of closed funds continues to plummet as LPs concentrate new commitments in an increasingly smaller range of fund managers. In acquisitions, the 10 largest closed funds absorbed 64% of the total capital raised, and the largest of them (the EQT X fund of US$ 24 billion) accounted for 12% of that total. Today, at least one in every five acquisition funds is closing below its target and it is common for funds to miss these goals by more than 20%
Furthermore, the fundraising does not recover immediately when the outflows and distributions improve. It usually takes 12 months or more for an increase in outflows to produce a turnaround in total fundraising amounts. This means that, even if the negotiations are resumed this year, it may take until 2026 for this sector to really 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
Assessmentto clearly identify how the fund presents itself to the market ‒ not what the LPs say but what they really think. To understand what needs to be adjusted, it is essential to obtain accurate insights about what really matters to strategic investors when choosing a fund
Portfolioanalyze where the value is within your portfolio and assess how individual actions add up ‒ and whether the whole is meeting the specific metrics that LPs value. It is also essential to implement the correct governance to make decisions regarding the timing of exit or resource allocation
Value creationfor better or for worse, the expansion of multiples has been a key factor in performance for years. However, in a high interest rate environment, the focus becomes profit margin and revenue growth. Resources to boost performance, effective portfolio monitoring and governance are also critical for creating value in a holistic way and making decisions that balance the best interests of the company as a whole
Investor relationsdevelop the right business moves to sell your narrative. This means segmenting the market by "customer", determine levels of commitment and design targeted strategies. A good renewal rate is around 75%, therefore, even for the main funds, there is almost always a gap to fill and the need to acquire 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 the market to become easier with the return of private capital. The raising of the next fund depends on a plan to become more competitive and prove this to investors now
