Private Equity Pulse: key takeaways from Q2 2024

Photographic portrait of Pete Witte
Pete Witte

EY Global Private Equity Lead Analyst

8 minute read 25 Jul 2024
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Private equity
IPO

PE sees its strongest quarter in two years.

In brief

  • PE firms spot robust opportunities backed by solid finance markets and clear macro views for portfolio growth.
  • Artificial intelligence (AI) drives value in portfolios and is a key investment focus.
  • Post-disruption, PE firms find prime long-term opportunities amid market recovery.

Private equity (PE) activity saw its strongest quarter in two years in Q2 2024. Firms announced 122 deals valued at US$196b, nearly double the US$100b announced in Q1, making it the strongest period for capital deployment since the downturn began in the third quarter of 2022.


For the last several quarters, dealmakers have been increasingly positive in their outlook for the transactions market, but actual activity has been relatively uneven; the last several months have seen a measure of that choppiness give way toward a stronger recovery trendline. PE firms are seeing a strong opportunity set that’s underpinned by robust financing markets and clearer visibility into the macro outlook and their portfolios’ growth prospects.

April and May were particularly active, with more than US$70b in transactions announced in each month; April saw 38 significant deals (valued at US$100m or above) and May saw 46, up from just 25 in January. June was softer by comparison, but still relatively active, with 38 deals valued at US$54b.

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The valuation gap – the difference between the price sellers want for their assets, and the price buyers are willing to pay – has been a primary impediment to deal-making since interest rates began moving higher midway through 2022. While such gaps are a common feature of market downturns, the most recent incarnation has been particularly sticky. Evidence suggests, however, that buyers and sellers are increasingly able to find common ground. According to Pitchbook data, M&A valuations have moved sideways for the last several quarters – after topping out at 11 times in 2021, the median M&A deal (across all industries) was struck at 9.5 times. And in our survey of PE GPs, 77% believed the valuation gap had narrowed over the last six months, although a majority (54%) still believe it’s a significant impediment to transacting.

What factors are causing the valuation gap to narrow?
of sellers are dropping the asking price to meet buyers' offers
What factors are causing the valuation gap to narrow?
combination of buyers moving higher and sellers moving lower

Take-privates remain a powerful theme, driven in part by the increasingly concentrated nature of the public markets, which hit a new high in Q2. In the US, for example, approximately 30% of the S&P 500 is comprised of just six tech stocks, up from 26% at the start of this year, and up from approximately 20% four years ago. As a result of public market investors’ increasingly narrow focus, PE firms continue to see opportunities in companies with compelling growth prospects that may have been left behind by recent market rallies. Firms announced 41 going-private deals in Q2, essentially double the number announced in Q1; in aggregate they had a value of more than US$100b, representing more than half of the quarter's total deal value.

Where does the deal market go from here?

Measures of sentiment remain high – currently, 73% of respondents to our quarterly survey of PE GPs expect that activity will increase over the next six months – roughly in line with March, and up significantly from six months ago, when 63% expected an increase in activity. 


Moreover, the types of deals they’re anticipating imply a more aggressive tilt. When GPs were polled at the beginning of this year about the types of deals they anticipated making, restructuring and distressed opportunities were a clear top response – almost two-thirds expected an increase; while a handful of transactions have indeed occurred, restructuring opportunities have been largely absent from the market. Improving macro fundamentals have kept interest coverage levels in check, and increased buyer appetite in the leveraged financing markets has reopened the window for refinancings. Today, only a third of investors expect distressed opportunities to increase.

Instead, GPs are turning their attention toward opportunities further up the risk curve. Six months ago, less than a quarter of GPs expected to see an increase in growth stage activity – now, along with an increase in secondary buyouts, it’s the leading area where PE firms see opportunity. The late-stage and growth equity spaces have been particularly capital-constrained through the downturn, yielding an opportunity for firms to provide financing to a broad array of companies.


Firms are also turning their attention to new industries and investment themes. Sports, for example, has been an increasingly powerful trend in recent quarters. As commercial opportunities crystallize and investment theses harden, the industry has seen a surge of capital deployed into the space; globally, PE firms have deployed nearly US$50b across nearly 500 deals since 2019. Substantial barriers to entry, low correlations with other asset classes, loyal customer bases that dwarf those of companies in non-sports verticals, and the diverse revenue streams that flow to sports teams and sport-adjacent markets provides a substantial roadmap for value creation for sponsors to pursue.

AI continues to be not just an active lever for value creation within the portfolio, but an active investment thesis. So far this year, PE firms have committed US$17b to AI and other machine learning (ML)-oriented investments, triple what they committed last year. The majority - 77% - was allocated to companies specializing in AI software, consulting, outsourcing and network management. Consumer businesses with AI/ML deeply embedded into their operations, such as online retailers, received 13% of the funding. Health care entities utilizing AI/ML for drug discovery, outpatient services, and health-tech innovation also garnered substantial PE interest.

Further, significant investments have been made in IT infrastructure providers that support the AI/ML industry. GPs are strategically investing in the energy and real estate assets that are essential to the infrastructure upon which AI/ML platforms depend. Notably, PE firms have announced approximately 30 large-scale deals (each exceeding US$1b) in data center services over the past five years.

Exits and the impact on fundraising

Exit activity ticked higher in Q2 as well, although it remains well below the levels of 2021-2022. Firms announced 90 exits in the second quarter of the year valued at US$113b, up marginally from the US$79b announced in the first quarter.

While there are several reasons for the bottleneck in exits, a dearth of buyers isn’t among them. In our survey of GPs, only 30% cited a lack of interested buyers as a fundamental impediment for exits. Instead, GPs are focused on ensuring that their portfolio companies are performing optimally and present a compelling equity story; waiting for valuations to improve to maximize value; and to a lesser degree, waiting for the IPO window to crack wider and pursuing alternative liquidity routes such as continuation vehicles.


Exits, of course, have their most visible impact on the fundraising market and LPs’ abilities to make new commitments. Right now, market participants are split on the degree to which fundraising conditions will improve over the next 12 months, perhaps a reflection of the bifurcated market for new funds. To date, buyout firms have raised just over US$300b; however, out of more than 250 separate PE funds that have closed this year, the top 20 funds have accounted for 61% of the total.


As a result, GPs are increasingly using a broader range of strategies to attract investment, most notably increasing the amount of co-invest they’re offering their LPs.


Outlook

The market is clearly emerging from a period of sustained macro disruption where companies have faced a raft of uncertainties – but it’s precisely these sorts of periods and their immediate aftermath where PE firms see some of their most compelling long-term opportunities. Firms will remain disciplined in their approach as they continue to pursue new and innovative investment thesis and seek out high-quality assets in resilient sectors. Most importantly, they’ll continue to control what they can – namely, the operational value levers that will position their companies to perform as the operating environment continues to stabilize.

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Summary

In Q2 2024, PE activity experience its strongest quarter in two years, with 122 deals valued at US$196b, nearly double from Q1's US$100b. This surge represents the highest capital deployment since the downturn in late 2022. Despite previous quarters’ fluctuating deal-making sentiment, recent months indicate a solidifying recovery trend. PE firms are capitalizing on abundant opportunities, bolstered by stable financing markets and a more transparent macroeconomic forecast, alongside clearer insights into their portfolio companies’ growth potential.

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    About this article

    Photographic portrait of Pete Witte
    Pete Witte
    EY Global Private Equity Lead Analyst
    Helping clients and stakeholders understand the trajectory and impact of vital trends. Developing thought leadership and insightful content. Aspiring platform tennis pro.
    Related topics
    Private equity
    IPO

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