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In this episode of the NextWave Private Equity podcast, Pete Witte explores the market environment, offering a detailed analysis of the current trends, deals and the overall financing landscape.
In this episode, Pete Witte, EY Global Private Equity Lead Analyst, addresses the notable difference between market sentiment and actual transactional activity, highlighting how this quarter marks the beginning of a convergence between the two.
Listeners will gain an understanding of how sentiment is measured, with Pete discussing the findings from the latest quarterly survey and their implications for the industry. The episode also focuses on the valuation gap, providing an in-depth look at the survey data and what it suggests for future transactions.
Furthermore, the podcast focuses on exits, currently the paramount for private equity professionals. Pete's experience will guide the audience through the strategic considerations and market dynamics influencing exit opportunities.
Key takeaways:
The podcast highlights the recent divergence between strong market sentiment and the actual activity within the private equity sector.
Despite the historical gap between valuations and market activity, the industry has seen its strongest quarter in two years, marked by increased deal volumes and capital deployment.
Private equity firms have shown significant interest in sectors such as technology, infrastructure, and sports, investing US$50 billion over the past five years.
The exits market faces challenges due to valuation gaps and the need for compelling equity stories, but there is growing momentum and a better macroeconomic understanding, along with secondary market growth.
You can also listen to this podcast on Apple and Spotify.
Teaser
Welcome to the EY Next Wave Private Equity Podcast, where industry leaders come together to discuss emerging opportunities and industry trends shaping the global private equity landscape.
Pete Witte
Hi everyone and welcome to the latest edition of EY’s Private Equity Pulse podcast. We'll break down everything you need to know about the market environment for private equity, including all the latest trends and deals, exits, fundraising and the financing environment.
Witte
My name is Pete Witte and I'm part of the PE practice here at EY. Thanks so much as always for joining and let's get straight into it.
Witte
Now one of the interesting things about this market environment is that there's been this strong disconnect between market sentiment and actual activity. For the last several months measures of sentiment have been moving steadily higher, so we do a sentiment analysis of the earnings calls from the public firms, for example, that shows the degree to which executives there are bullish on the environment. That's been much more positive since the beginning of the year.
Witte
We do a quarterly survey of GPs where somewhere between 70 and 80% say they expect activity to increase over the next few months. So, all these sentiment measures have been really high. But to date, actual activity has been a lot more uneven, right, we've seen a choppy market.
Witte
This quarter, however, we started to bridge that gap a little bit. So private equity activity by value saw its strongest quarter that we've seen in the last two years essentially since the middle of 2022 when the downturn really began in earnest. April and May in particular, we saw about $65 billion deployed in each of those months, which is way beyond what we've been seeing on a monthly basis for the last several quarters.
Witte
And volumes are trending higher as well. So, we tend to attract significant deals which we define as anything you know, over $100 million. Earlier this year, they were running in the 25 or 30 range a month. Now we're seeing more like 35 to 40 of those on a monthly basis.
Witte
Now we talked a lot about the valuation gap in the survey we just did, almost 80% believed that the valuation gap has narrowed over the last six months.
Witte
But most folks believe that valuations are still too high. Two thirds of the GPs that we talked to say valuations are one of the primary impediments to doing deals right now. So, there's still ways to go in fully bridging that. But regardless, when you combine that with more robust financing markets, greater visibility into the macro-outlook, and the growth prospects for these PortCo’s the underwriting starts to get a little bit easier and we're starting to see that translate into some of the numbers.
Witte
We continue to see a lot of Take-Privates. We saw more than $100 billion worth of Take-Privates this past quarter. That was double what we saw in the first quarter. We've seen a lot of recovery in the public markets, but at the same time, there's a lot of companies that are getting left behind, and those companies remain interesting for a lot of private equity shops.
Witte
As we go forward, I suspect that we're going to see private equity firms take more of a risk on approach. One of the things that came out of our survey that was interesting is that six months ago when we asked folks what kind of deals they expected to do this year, Restructuring and Distressed, top of the list.
Witte
Growth year types of investments were at the very bottom of the list. Now those two are flipped, so growth has jumped to the top, Restructuring has fallen almost all the way down to the bottom, right. So again, it's just another way that we see sentiment evolving and changing as the operating environment starts to get clearer and that confidence starts to come back into the market.
Witte
Now, what does that look like from a sector perspective? Well, it means continued investment in tech, in SAS, but also some of the emerging spaces like AI and all the investable areas around that, which includes not just the platform in the applications, but especially the plumbing that goes into enabling it. We see that all the time in the early stages of the development of transformational technologies, where investors pursue the picks and shovels at the stage where the application ecosystem is still really getting sorted out.
Witte
I think we also see shops looking for asset classes and investment themes that are less correlated with the broader market. And infrastructure is a great example of that. We see some large announcements around partnerships between corporates and sponsors. Sports is another great example, probably the hottest area in private equity right now.
Witte
Private equity firms have deployed about $50 billion in sports over the last five years and at a time when M&A activity has declined significantly across a broader market, the number and value of those deals keeps going up. Over the last 12 months, we've seen about a 30% increase in the number of deals around the sports space.
Witte
Leagues are opening to investment in a way that they haven't before. New pools of capital being formed, they're specializing in the sector, and it makes sense because you have these business models with high barriers to entry, huge sometimes, you know, rabidly loyal customer bases and a lot of diverse revenue streams with headroom for additional growth.
Witte
So, there's a tremendous number of tailwinds that are continuing to drive activity there. But overall, with respect to deals, bottom line, the market has been choppy for the first half of the year. We could see more of that along the way, but momentum is building. We're starting to see firms take more advantage of the improved visibility into the macro situation in the market right now.
Witte
Now let's switch gears a little bit and talk about exits, which is really the number one area of focus in PE right now. GPs, LPs are all looking for the exits market to open back up again. And while I'd say anecdotally, we've seen more processes spool up, we haven't necessarily seen those translate into announced deals. Exits ticked higher in the second quarter, but not by a whole lot, you know, they've basically been pretty range bound for the last several quarters.
Witte
So why is that? Well in our survey we asked GPs what the bottleneck was. They said two things. One, they said they were waiting for PortCo performance to improve or for the company to be in a stronger market position.
Witte
They want to be able to tell a strong equity story and to be able to give potential buyers a clear indication of the trajectory of the business. And especially right now that involves a lot of scenario analysis because of the relatively broader range of macro-outcomes that companies are having to deal with.
Witte
Two, they're also waiting for the right valuations, especially those companies that were acquired 3, 4, 5 years ago that are in their prime exit window right now, getting that valuation right is really, important. Which is interesting, right, because remember, we heard something similar from GPs on the acquisition side so there's this weird liminality in the market where as buyers, valuations are too high, but as sellers, they are too low.
Witte
Now, one thing that's not holding up exits is a lack of buyers. In our survey, only 30% of GPs cited a lack of interested buyers as a fundamental impediment to exits. That was the lowest response. And so, in the meantime, we'll continue to see firms work with continuation vehicles, with NAV loans and so on, in order to get some liquidity. And especially we'll continue to see assets flow in the secondaries.
Witte
That's one of those dynamics that we sometimes see where temporary dislocations can often catalyze permanent evolutions. And the growth of the secondary market is going to be one of the defining evolutions of this area of private equity, especially as public markets become increasingly concentrated.
Witte
In the US, for example, market concentration hit a new high this quarter, where 30% of the S&P 500 is comprised of just six stocks. That's up from 26% at the beginning of this year. It's up from 20% four years ago. And so, as investors look for that diversification, the growth of the secondary markets and private capital is going to become an important part of the solution.
Witte
That's it for this quarter's podcast. Thanks, as always for joining. We'll be back next quarter with some more views.
Teaser
Thanks for joining the EY Next Wave Private Equity Podcast. For more insights and perspectives, visit ey.com/privateequity.
End of podcast.
