more dry powder

2024 finds Private Equity Cash Heavy   

2024 Private Equity Cash Heavy Landscape  

Happy New Year as 2024 presents a unique opportunity and challenge for the private equity (PE) industry, as it faces a record amount of dry powder, estimated at $2.59tn, and a massive backlog of unsold portfolio companies, valued at $2.8tn. These figures reflect the strong fundraising activity and the subdued exit activity of the past few years, as well as the concentration of capital and deals among the top 25 PE firms, which account for nearly 25% of the global dry powder. These firms include well-known names such as Apollo Global, Blackstone, KKR, CVC Capital, and Advent International. 

The PE industry is under pressure to deploy its capital and realize its investments in a challenging market environment, marked by high valuations, low IPO activity, and slowing global growth. According to Bain & Co., PE exit transactions in the last quarter of 2023 reached the lowest level in a decade, leaving many PE-backed companies in a “towering backlog” of potential exits. This has created a disconnect between the expectations of PE sellers and the demands of PE buyers, as well as a frustration among limited partners (LPs), who have seen their distributions from PE funds decline over the past five years, despite committing more capital to new funds. 

To overcome these hurdles, PE firms are expected to adopt a more proactive and creative approach to deal-making in 2024, both on the buy-side and the sell-side. On the buy-side, PE firms are likely to pursue more carve-out deals, in which they acquire non-core divisions or assets from large corporations, often at attractive prices and with less competition. Carve-out deals offer PE firms the opportunity to unlock value from underperforming or undermanaged businesses, and to leverage their operational expertise and network of contacts to improve their performance. The biggest PE deal of 2023, GTCR’s acquisition of Worldpay from FIS for $18bn, exemplifies the appeal and potential of carve-out deals. As we enter 2024, many PE firms are eyeing similar opportunities, especially in sectors such as technology, healthcare, and consumer goods, where large corporates are looking to streamline their portfolios and focus on their core competencies. 

On the sell-side, PE firms are likely to employ more structured transactions, in which they use various financial engineering techniques to bridge the valuation gap and facilitate the exit process. These techniques include performance-based earn-outs, deferred payments, vendor financing, and rollover equity, which allow PE sellers to share the risk and reward of the future performance of the business with the PE buyers. Structured transactions can also help PE sellers to optimize their tax and accounting outcomes, and to align their interests with the management teams of the portfolio companies. Structured transactions are particularly suitable for complex or uncertain businesses, where the future cash flows are difficult to predict or depend on external factors. 

In conclusion, the PE landscape in 2024 is shaped by a combination of unprecedented capital availability, a huge inventory of unsold investments, and a challenging market environment. To succeed in this landscape, PE firms will need to be more agile, innovative, and value-oriented in their deal-making strategies, both on the buy-side and the sell-side. The first half of the year is expected to see a surge in deal activity, as PE firms seek to capitalize on the opportunities and overcome the challenges that lie ahead. 

Sources: 

  • (1) Five key trends for private equity firms in 2024 | EY – US. https://www.ey.com/en_us/private-equity/five-key-trends-for-private-equity-firms-in-2024. 
  • (2) 2024 Outlook: Private Equity & Venture Capital. https://www.cambridgeassociates.com/insight/2024-outlook-private-equity-venture-capital/. 
  • (3) Top Private Equity Trends in 2024 | Allvue Systems. https://www.allvuesystems.com/resources/top-private-equity-trends/. 
  • (4) BluWave’s 2024 Private Equity Market Outlook: The Start … – Morningstar. https://www.morningstar.com/news/business-wire/20231116426705/bluwaves-2024-private-equity-market-outlook-the-start-of-a-new-growth-cycle. 
  • (5) PE in 2024: Outlook, Trends & Hiring Top Talent | Hanover US. https://www.hanoversearch.com/us/blogs/2023-11/private-equity-in-2024. 
  • (6) Private equity: US Deals 2024 outlook – PwC. https://www.pwc.com/us/en/industries/financial-services/library/private-equity-deals-outlook.html. 
  • (7) 2024 Global Private Equity Outlook – dechert.com. https://www.dechert.com/content/dam/dechert%20files/services1/practice-areas/private-equity/2024-Global-Private-Equity-Outlook.pdf. 
  • (8) Private equity exit strategies to create value | McKinsey. https://bing.com/search?q=private+equity+exit+strategies+2024. 
  • (9) Navigating Successful Exits in Private Equity to Maximize Returns. https://www.americanbar.org/groups/business_law/resources/business-law-today/2023-august/navigating-successful-exits-in-private-equity-to-maximize-returns/. 
  • (10) Navigating Successful Exits in Private Equity to Maximize Returns. https://businesslawtoday.org/2023/08/navigating-successful-exits-in-private-equity-to-maximize-returns/. 
  • (11) Private equity exit strategies and the role of an exit story | McKinsey. https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/private-equity-exit-excellence-getting-the-story-right. 
  • (12) Kramer Levin Expands Leading Private Equity and Mergers & Acquisitions Practice With Addition of Partner Arlene J. Ortiz-Leytte. https://www.tmcnet.com/usubmit/2024/01/02/9939381.htm. 
  • (13) BlackRock’s 2024 Private Markets Outlook Forecasts … – Morningstar. https://www.morningstar.com/news/business-wire/20231211384304/blackrocks-2024-private-markets-outlook-forecasts-continued-growth-across-asset-classes. 

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