EY helps clients create long-term value for all stakeholders. Enabled by data and technology, our services and solutions provide trust through assurance and help clients transform, grow and operate.
At EY, our purpose is building a better working world. The insights and services we provide help to create long-term value for clients, people and society, and to build trust in the capital markets.
In this episode of the NextWave Private Equity podcast, Pete Witte explores the current private equity landscape, where deal activity is rising, and valuation gaps are closing.
The private equity (PE) market is bouncing back, with deal activity picking up thanks to clearer economic indicators and better financing options. Despite this dealmaking boost, exits are slower, posing challenges for investors and firms. The tech sector stands out, attracting significant PE interest due to favorable financing conditions, signaling a trend of increased tech-focused deals ahead.
Key takeaways:
PE deals experienced a significant surge in 2024, especially in the second and third quarters, buoyed by growing market confidence, clearer economic indicators and improved financing conditions.
The technology sector, fueled by advancements in artificial intelligence (AI) and cloud computing, leads growth, with a notable increase in demand for high-quality assets indicating a market primed for capital investment.
Exit strategies encounter headwinds, with a downturn in value and sluggish IPO activity, prompting a shift in investor focus toward cash flow, while PE firms continue to pursue disciplined, strategic acquisitions and business expansion.
You can also listen to this podcast on Apple and Spotify.
Announcer
'The Global PE Pulse Podcast from EY'.
Pette Witte
Welcome to the latest edition of the PE Pulse podcast. My name’s Pete Witte, and I’m part of EY’s Private Equity practice. And in this episode, we’ll be talking about some of the major trends in the private equity market, the financing environment, and the big question on everybody’s mind, what’s going on with exits?
But first we’re talking deals, that’s next.
Announcer
‘This quarter's deals environment - acquisitions exits and financing’.
Witte
Ok, let's set the scene for the deal market.
The second quarter of 2024 was the most active quarter for new PE deals since the downturn started more than two years ago. And Q3 was pretty much in line with that.
Globally, firms announced 138 significant deals in Q2. They announced 139 in Q3. That's up from about 90 in the first quarter. So where does that put us on the year? Right now, activity is up 18% by value and it's up almost 40% by volume so far this year versus last.
So those are the high-level stats. And what they do is they paint a picture of recovery that's well underway.
People are more comfortable with the macro-outlook. There's a lot more clarity on rates, that's giving folks more confidence to transact.
We see a lot more stability in the financing markets where spreads have come down and traditional lenders and private credit funds are out there actively competing for deals. And then clearly the rate cuts are going to be a strong tailwind here as well. Certainly, on the underwriting side and just reducing the overall cost of capital making it easier for private equity firms to do deals.
But I think even more importantly will some of these second order impacts that we'll see, stability in the portfolio and increased confidence amongst transactors, especially on that corporate side.
Ok, coming next, some views on market themes.
Announcer
‘This quarter's key market themes and fund priorities’
Witte
Now, once a quarter, we go out and we survey a representative sample of GPs just to get their views on the key market themes. And one of the things that we asked them this time around was, what do you really need to go out and kick start deployment activity in earnest?
And so, the valuation disconnects ranked high. Rate cuts probably not surprisingly, ranked high, but the number one thing firms said that they needed was an increased volume of assets coming to market. Just a greater quantum of high-quality deal flow to go out and put capital to work.
I think there's this sense that for much of the last year there's been too few high-quality assets that were coming to market and those that did were bid up aggressively by sponsors looking to deploy some of that capital. And people weren't ready to take the risk on for anything that was too complex in a time of elevated volatility.
Now that's changing. We're seeing, for example, a rotation back into tech. Not that the market ever fully stepped away from it, but we are seeing a greater emphasis there. Tech deals accounted for about 1/3 of PE activity by value in the first quarter of the year. Right now, they're about 40%.
And that's being driven by some of the traditional spaces like SAS and cyber, but also some of the newer areas of focus like data infrastructure and data centers. So, Blackstone for example, and CPPIB, they acquired Australian Data Centre AirTrunk for about $16 billion. That was the largest deal of the quarter. And that's just one of many deals in that space.
We certainly see a lot of interest from our clients around it and the reasons for it are compelling. That market is expected to grow at a CAGR of 10, 11% between now and 2030. And AI is absolutely a major driver of that. But it's not the only one. It's a continued move to the Cloud. It's IoT, it's edge computing. It's all these long term, secular trends.
The other thing in our survey, 70% of GPs said that they expect deals in the tech space are going to increase over the next six months. That was the number one answer.
Healthcare was another space where GP’s think we'll see more deals as was financial services. Other spaces where we're seeing a lot of interest include asset-based finance, health and wellness, personalised medicine, white label goods, sports, infrastructure and then roll ups across a wide range of spaces, everything from traditional physician practices and dental practices to the trades, like plumbers, electricians and so on.
And there's a lot of private equity shops that are really interested in the energy transition both on the traditional side and the renewable side as well.
Right, so, to round off this episode, we’ll look ahead with some forecasting next.
Announcer
‘Outlook for the next 6 to 12 months’
Witte
And let’s start by talking about exits. Globally we saw 86 exits in Q3, total value about $100 billion. That's down 17% by value from Q2. And it's pretty much within the range that we've seen in the last couple of years. While private equity firms have been active in selling to other private equity firms the value of sales to corporate acquirers, which generally represents anywhere from 2 thirds to 3 quarters of exit activity that’s down 16% from last year.
And we haven't necessarily seen a whole lot of momentum yet on the IPO front either, although folks are watching very closely to see if that window is going to open after a handful of recent deals. And so, we continue to see LPs highly focused on cash flow.
I think the expectation is that if valuations have really bottomed out and are expected to stay either where they are or increase from here as about 3/4 of our survey respondents expect, then it's reasonable that we could see some momentum start to build here over the next several months.
Right now, 53% of GPs expect exits will increase over the next few months. About 1/3 think they'll stay where they are, so fundamentally, still just not a whole lot of conviction here.
And so, in the meantime, firms are going to continue with a highly disciplined approach. One of the last things that we asked folks in our survey this quarter was around the factors that are going to drive out performance over the next 12 months. Essentially, we were wondering, given the macro-outlook and the operating environment, is there anything about this that's going to create any sort of pivot with respect to where firms are focused or what they're going to do to drive value. Whether it be more of a focus on sector, or on refinancing, will it be more of a focus on cost takeout from the PortCos.
But the responses are pretty much in line with the core PE playbook. Number one, first and foremost, investors want to pay reasonable prices for the companies they're acquiring. Number two, they want to source attractive assets. Number three, they want to help those businesses grow their top line. Fundamentally, just the building blocks of the PE model.
That's it for this quarter. Thanks as always for listening. Please be sure to check out our accompanying PE Pulse report and I'll see you soon with our year end wrap up and predictions for 2025.
Announcer
The Global PE Pulse Podcast from EY, back next quarter. For more on the latest market trends, go to ey.com/pepulse
