Private Equity in 2023 and way forward

from Bain Global PE Report 2024

Last year was a unprecedented year, with interest rates touched new highs, recession noises were looming, banks collapsing, geopolitical tensions at the peak(Russia, Ukraine, Israel, Hamas). Record-low unemployment, reasonable growth, and surging public markets. So much diversity that no parallel can be drawn in the history. Hence it became a unique benchmark year itself.

These crossed signals have left private equity hamstrung. Deals making evaporated which means Deal Exits were also stalled. Economic conditions are more perplexing than predictable in 2023.

Such declines in activity have had a chilling effect on fund-raising. Slower distributions have left LPs cash flow negative, crimping their ability to plow more capital back into private equity. The industry still raised an impressive $1.2 trillion in fresh capital in 2023, and the buyout category attracted $448 billion. But LPs were highly selective. While capital flowed to the largest “reliable hand” buyout funds, fund-raising for most was as hard as it’s ever been.

Way forward

Buyout funds alone are sitting on a record $1.2 trillion in dry powder, and 26% of that is four years old or older, up from 22% in 2022. That creates a heavier incentive than normal for GPs to get off the sidelines and start buying, even if conditions aren’t ideal. Activity is already ticking upward, and with help from the Fed and the European Central Bank, the bias in 2024 is likely to the upside when it comes to deal count and value.

Starting of rate cuts will kick off the cycle back with force. But that may not be enough, as apart from Multiple and Revenue expansion, Portfolio managers needs to drive the value by increasing the margins.

PE might offer innovative solutions like continuation funds, securitizations, and NAV financing to help GPs recap prized assets and wait for returns to ripen while keeping economic interest aligned between GPs and LPs.

Private equity survived the overexuberance of the RJR Nabisco years. It lived through 9/11 and the subsequent recession. It took the worst blows of the global financial crisis and came out even stronger. The industry, in other words, has consistently demonstrated its resilience.

Full report here

https://lp.bain.com/WBN-Private-Equity-2024-03-19-Private-Equity-Report_.html

RJR Nabisco

https://www.tampabay.com/archive/1999/03/11/the-sad-story-of-rjr-nabisco/#:~:text=The%20tobacco%20business%20proved%20not,Nabisco%20more%20than%20its%20competitors