Private Equity Pulse

Private Equity Pulse: key takeaways from Q3 2024

Photographic portrait of Pete Witte

7 minute read 24 Oct 2024

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Private equity activity is up 36% by value this year versus 2023.

In brief

PE deals surge 36% in value, hitting a high not seen since a two-year lull. Valuation gaps are closing, leading to more completed deals.
The PE market remains upbeat, expecting growth from rate cuts and increased deals. Firms aim to boost their companies’ revenue for stronger results.
The tech sector draws PE interest, with good financing conditions suggesting more deals to come.

The recovery in the transactions markets that began in Q2 continued into Q3. Globally, private equity (PE) firms announced 135 significant deals during the quarter, in line with Q2. And while the value of those deals dipped slightly, the last six months nonetheless collectively represent the most active period for PE since increased volatility began in the deals market over two years ago.

Year-to-date PE activity has increased 36% by value versus the same period in 2023 and is up 18% by volume. It’s becoming increasingly clear that rising sentiment is translating more directly into deal activity and that the valuation disconnect – one of the primary market impediments, and something that has been particularly sticky in the current downturn – is beginning to narrow enough that an increasing proportion of transactions is reaching the finish line.

Markedly improved conditions in the financing markets remain a key enabler of increased deployment activity, with both traditional lenders and private credit funds actively competing for deals amid rising risk appetite, strong collateralized loan obligation (CLO) formation and spreads that are touching multi-year lows. According to Pitchbook LCD, US leveraged buyout (LBO)-related loan volume increased 65% in Q3 versus Q2, with US$59b in announced loan transactions, and dividend-related issuance on pace for a record year. Similar trends are extant in Europe, with €63b in loan activity announced so far this year, up from just €20b over the same period in 2023.

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Tech continues to be a powerful theme, driven by both a rotation back into more growth-oriented assets in light of rate cuts, and the long-term secular promise of the sector. Technology deals accounted for 40% of private equity deployment by value in Q3, up from 34% in Q1. Spaces like data infrastructure continue to attract significant attention – Blackstone’s US$16b acquisition of Airtrunk (alongside CPPIB) represented the largest deal of the quarter and another in a string of deals driven by long-term secular themes, including companies’ continued transition to the cloud, growth in the Internet of Things (IoT) space, and rapidly growing data needs from AI adoption. It’s estimated, for example, that the data demands of generative AI (GenAI) applications could result in a fiftyfold increase in the number of workloads processed worldwide by 2028. In aggregate, 70% of GPs we surveyed expect an increase in tech deals over the next six months, the most of any sector.

How does the deal market unfold from here?

US rate cuts should be a strong tailwind for sponsors and for the M&A markets more broadly – not only by lowering private equity’s cost of capital and making it easier to underwrite investments, but also in building transactors’ confidence around the macro flight path and target valuations. In our latest PE Pulse survey, 74% of GPs expect that deployment activity will increase over the next six months – that’s up from 63% at the beginning of the year. Survey respondents also cited an increased volume of assets coming to market as the No. 1 factor needed to jump-start additional deployment activity, ahead of financing issues, fundraising concerns, and even valuations. For much of the last year, there has been a broad sense that too few high-quality assets were coming to market, and those that did were bid aggressively by sponsors looking to deploy capital. Reduced borrowing costs and positive momentum across the broader capital markets should help encourage a normalization of transaction flow over the coming months.

Exits continue to seek momentum

Exits continue to seek the more fulsome recovery evident on the buyside. Globally, firms announced 84 exits in the third quarter with a total value of US$99b, down 19% by value from Q2, and roughly in line with the range seen over the last two years.

Strategic buyers remain largely on the sidelines; over the last nine months, the value of sales to corporate acquirers has declined 17% from the year prior, with US$167b in announced transactions. By contrast, private equity firms have been more active in purchasing from one another – secondary exits have increased in value by nearly 150%, from US$51b year to date 2023 to US$129b so far this year.

Market participants are also closely watching the IPO markets for signs that the window is opening more broadly. This year has seen 26 PE-backed companies go public, down from 30 a year ago – however, the pipeline for deals looking to price is robust and optimism is buoyed by softening global interest rates and the alleviation of inflationary pressures, changes that are creating increasingly favorable conditions for new listings. Healthy IPO returns, which have consistently met or outperformed benchmark indices, add to the positive outlook, and strong capital markets in key regions such as the US and Europe are further bolstering positive sentiment.

GPs remain cautiously optimistic with respect to the outlook – currently, 53% of GPs expect exits will increase over the next few months, up from 34% at the beginning of this year. Any measure of increase will be a welcome evolution for GPs and LPs alike. In our survey, we asked GPs to rate the amount of pressure they were feeling from their investors around distributions on a scale of one to 10; 74% of GPs rated it between a five and a seven.

Firms remain focused on value creation, particularly top-line growth

In the meantime, firms remain highly focused on operational value-add to maintain outperformance as hold periods get extended. According to Pitchbook, PE firms hold more than 28,000 assets, 40% of which have been held for longer than four years. Amid the macro turbulence of last year, firms were highly focused on managing liquidity and on cost reduction initiatives; and while those areas remain high on firms’ agendas, top-line growth has moved higher in the priority stack.

For example, when we asked GPs 12 months ago how focused they were on working capital, 80% responded with “somewhat” or “significantly” more than usual; today, that percentage has dropped by 10 points to 70%. It’s a similar dynamic with respect to cost-cutting – 12 months ago, 70% of GPs said they were “somewhat” or “significantly” more focused on it than usual – today, 64% report the same. By contrast, top-line growth is the only area to see an increase in firms’ focus – 12 months ago, 55% of PE GPs reported additional efforts there – today, that percentage is marginally higher, at 57%.

What will drive PE outperformance over the near term?

An increasingly accommodative financing environment for both new deals and existing portfolio companies, combined with improved macro atmospherics that pulls transactors from the sidelines, should continue to create favorable tailwinds for compelling opportunities in the coming months. As they proceed, firms will remain disciplined as the operating environment continues to evolve and remain laser-focused on the fundamental building blocks of the PE model:

sourcing attractive assets
paying a reasonable price
helping companies grow.

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Summary

Private equity activity has risen 36% in value this year, signaling a robust recovery from a two-year downturn. Optimism prevails as firms focus on revenue growth and anticipate more deals, spurred by potential rate cuts. Firms are concentrating on revenue growth to enhance performance. The tech sector particularly has attracted significant PE interest, supported by favorable financing conditions, indicating a robust pipeline of deals ahead. This momentum underscores a revitalized PE landscape poised for growth.

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About this article

Photographic portrait of Pete Witte

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.