Private Equity Pulse: key takeaways from Q1 2024

Photographic portrait of Pete Witte

5 minute read 26 Apr 2024

Related topics

Sentiment continues to rise amid an uneven quarter for deals.

In brief

Sentiment among PE dealmakers rose in Q1 due to more macro clarity, increased visibility into interest rates and a perceived valuation gap.
Though tech still dominates sectors, its investment percentage of total deployment dipped slightly in the last 12 months.
Rising activity in coming quarters will be boosted by greater availability of financing.

Sentiment continued to rise amongst PE dealmakers in Q1, driven by greater macro clarity, increased visibility into interest rates, and a sense that the valuation gap – one of the primary impediments to dealmaking in recent quarters – continues to resolve. Nonetheless, announcements remain markedly uneven; It’s becoming increasingly clear that while the PE market will continue to recover over the balance of the year, its path will be nonlinear.

Interest in take privates and carve-outs remains high

PE firms announced US$92b in deals during the first quarter; in a reversal of last quarter’s trend, strength in the US – where value jumped more than 70% – was offset by declines in Asia-Pacific and Europe.

Private equity value creation services

Value creation is at the core of every transaction investment thesis. Our business is organized, resourced and led to help private equity firms transform companies and increase their ability to create more value across their portfolio.
Read more

Large deals continued mostly unabated – the number of transactions of US$3b or more climbed by a third, driven by continued activity in take-privates and carve-outs. The first quarter saw 21 take-private deals, underscoring the degree to which PE firms continue to perceive opportunities and mispricings, despite tremendous recent gains in public equities indices. Technology, industrials, energy, defense, consumer, and financials are all spaces where PE firms have led de-listings in recent months.

Carve-out activity remains similarly robust, as strategics continue to rationalize their businesses and raise cash to invest in core competencies. Last quarter, carve-outs made up 20% of deployment activity by value, versus approximately 5% in Q1 2023, and 11% in Q4 2023.

From a sector perspective, tech remains a dominant theme, although investment as a percentage of aggregate deployment has dipped slightly over the last 12 months versus the prior 12. Consumer, by contrast, over the same period grew from 10% of aggregate deployment by value to 14%, driven by interest in verticals such as health food, luxury retail, and pet care. Financials also received a larger share of invested capital, growing from just 6% of deployment by value a year ago to 16% over the last 12 months. While activity in the insurance sector has been a major driver, brokers, wealth managers, and even regional banks have all seen elevated interest from sponsors.

GPs continue to expect an increase in deployment

Expectations continue to rise for an uptick in activity as the year progresses. According to the latest PE Pulse survey, 76% of GPs expect deployment to increase over the next six months, up from 63% in December.

Sentiment analyses of public PE earnings show similar trends – over the last two years, the ratio of positive statements to negative ones has been mostly rangebound, between 25 and 45; however, Q1 saw a marked uptick in optimism across most of the large firms as they talked through 2023 performance and the 2024 outlook, pushing the median sentiment score to 71.

Sponsor-to-sponsor deals see uptick amid continued exit drought

As hold periods continue to increase – in the US, for example, average hold periods hit 5.3 years last year – pressure continues to build for realizations. While many corporates remain more focused on selling – in particular, carving out noncore divisions – sponsors have been more active in acquiring PE assets. Q1 saw the value of secondary exits rise 27% versus Q4. In aggregate, secondaries accounted for 26% of exit activity by value in Q1, marking the highest level of the last year.

As secondaries come to the forefront, and as the IPO window appears to crack open again with the launch of Reddit and Astera Labs, market participants expect an increase in exit activity in the coming months. In December, roughly one-third of survey respondents expected exit activity to increase; presently, 50% of GPs expect exits to move higher in the coming months, while another 23% expect them to stay in line with current levels.

In the meantime, both LPs and GPs are pulling available levers to facilitate liquidity – trading interests on the secondary market, participating in continuation funds, and in some cases, using NAV loans to help facilitate distributions.

Outlook – rate trajectories could impact deployment activity

One tailwind for activity in the coming quarters is the increased availability of financing. Over the last 18 months, traditional lending sources have had limited appetite for PE transactions, allowing private credit firms to step into the gap. Last year, private credit funded roughly 85% of PE transactions.

The last several months, however, have seen traditional lenders reassert themselves amid stabilized rates and increased demand from buyers of leveraged loans. The market has seen a number of high-profile deals bid by both banks and private credit firms, a dynamic that is likely to continue over the balance of the year.

Survey respondents point to expectations for continued stability in the credit markets – when asked six months ago, one-third expected credit conditions would improve, one-third expected them to stay the same, and another third expected conditions to deteriorate. Currently, however, GPs are increasingly optimistic – close to 90% expect credit conditions to either stay where they are or improve.

However, GPs also expect that rates will stay higher for longer. In our survey, more than 60% of GPs think central banks will cut more slowly than what the market is anticipating.

In aggregate, as macro uncertainty continues to abate and a soft landing increasingly becomes the base case forecast, the conditions for a more active market are primed. However, firms will continue to remain conservative in their underwriting of potential transactions in order to ensure that value creation plans are able to support the modeling across a broad range of rate scenarios.

Summary

As macro uncertainty eases, market conditions prime for more activity. But firms will continue to remain conservative in their underwriting of potential transactions to ensure that value creation plans support rate variations.

Related content

How GenAI is reshaping private equity investment strategy

A balanced approach to investment strategy is needed to defend against GenAI disruption while also driving portfolio performance. Learn more.

Bridget Walsh

Three questions to help rethink your exit strategy now

As deal flow starts to pick up, private equity firms have an opportunity to create maximum value, but action is needed.

Konstanze Nardi

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.