What do the PEs seek? Accommodating market fluctuations while maximizing returns.

Private equity firms faced multiple challenges in 2023, including a banking crisis, increased capital expenses, high interest rates, and regulatory scrutiny. These challenges dampened deal activity considerably, resulting in the lowest deal value and deals volume in five years. As a result, PE firms focused on acquiring minority stakes rather than outright acquisitions, reducing the cost of the deals while providing both buyer and seller with an increased incentive to enter into the transaction. Furthermore, less funding was raised by PE firms, with the number of funds that raised, falling by ~45% over 2019-23. To avoid investor lock-in, PE firms have taken to raising funds on a deal-by-deal basis. The valuation gap between buyers and sellers has also led to fewer exits and an unprecedented holding period of 5.6 years in 2023.

However, the overcast may be coming to an end. Steady inflation and interest rates provide PE firms with the opportunity to execute more efficient transactions and develop a more sustainable cost structure. Fundraising statistics also indicate a path to recovery, with a total of around $136 billion year-to-date (source: refinitiv). In the coming year, closing significant valuation gaps between buyers and sellers will be critical. The correction of deal multiples due to interest rates could also lead to moderate asset price expectations for sellers. While uncertainties remain, including price volatility and geopolitical tensions, the PE industry seems poised for a potential rebound.