Buyout Shops Go From Boom to Bust to…Meh
There is some easing of the drought for private-equity firms, but don’t call it a bounceback yet
Not long ago, private-equity firms were on top of the world. They were raising record amounts of money, and cheap debt powered a deal frenzy. Then the Federal Reserve began raising interest rates, and the music stopped.
Today, buyout firms remain under pressure and are settling into a new normal of slower, less-profitable dealmaking. The hope is that things might pick up in 2025 if the Fed, as expected, begins to cut rates this month and if November’s presidential and congressional elections result in some measure of political certainty.
Already there are some promising signs. Deals in which public companies are taken private, for example, are on the rise. This year through late July, there have been 13 megadeals globally—defined as those valued at more than $5 billion—versus eight in all of 2023, according to data from S&P Global Market Intelligence. Transaction value totaled $123.64 billion as of July 29, far more than the roughly $75 billion in megadeals struck in all of last year.
Meanwhile, a drop in bond yields ahead of a possible Fed move has led to more activity in the leveraged-loan market. That has helped fuel about $164 billion of leveraged buyouts in the U.S. as of early September, not far off the approximately $169 billion done in all of 2023, according to Dealogic.
Still, the buyout bust is far from over, and sales of companies remain elusive.
One reason: Many deals were struck during the heady days of 2020 and 2021. Firms are unlikely to sell businesses today for the price they paid back then, let alone at a premium.
That has led firms to put off sales in the hope of a narrowing of the price-expectation gap between buyers and sellers. The gulf between the two sides has slammed exit activity, which tracks how many companies private-equity firms sell.
As of June 30, some 424 businesses were sold by firms in the U.S., or only about a third of exits in all of 2023, according to the data provider PitchBook. This year’s second quarter was particularly moribund, producing the lowest number of exits in the past decade, save for the onset of the Covid-19 pandemic. Tim Clarke, lead analyst for the private-equity group at PitchBook, said he expects the number of exits to settle higher owing to late reporting of deals.
The value of exit deals, at about $141 billion, was on pace with that seen in the same period in 2023. Yet total deal value that year, at around $286 billion, was the lowest since 2012.
A lack of deals has a knock-on effect on private-equity investors including pension funds. Huge pools of their cash are now effectively frozen in buyout funds, making them less likely to commit more capital.
Through the second quarter of this year, 704 funds have been raised globally, attracting about $366 billion in new capital, according to S&P Global Market Intelligence and Preqin. If the capital flow continues at the same pace through the remainder of the year, S&P and Preqin estimate total fundraising will decline about 20% from 2023.
Among funds raised this year, the European private-equity firm EQT had one of the largest sums, notching about $24 billion in new investment. Tech-focused Silver Lake collected roughly $21 billion, and Vista Equity Partners amassed about $20 billion.
Although some large funds are able to collect capital, midmarket firms trafficking in smaller deals are having a harder time raising more money. This is because their limited partners have less cash to dole out since they already have so much exposure to private equity.
What’s more, many of those investors, and especially pension funds, are clamoring for cash returns, which are few and far between owing to the slump in exit activity.
In 2021, the average percentage rate of net asset value returned to investors was about 31%. It dropped to roughly 12% at the end of 2023, according to Hamilton Lane Data via Cobalt.
To send money back to their stakeholders, firms are getting creative. They are selling small chunks of companies to each other to free up cash.
Among these stake sales were some of the biggest deals in the past year, including the sale of 50% of Veritas’s health tech company Cotiviti to KKR at an $11 billion valuation and Bain’s sale of a stake in the building-materials company US LBM to Platinum Equity at a roughly $7 billion valuation.
“The pressure to put money to work and the pressure to return capital hasn’t abated; it has only intensified,” said Jeffrey Greenip, the global head of financial sponsors at the investment bank Jefferies.