In 2023, private equity had one of its worst years since the global financial crisis, as firms were spurred in part by heightened interest rates, according to Bain & Co.’s “Private Equity Outlook 2024: The Liquidity Imperative” report.
The decline continues a trend that started in 2021, as private equity saw a steep decline in dealmaking, fundraising and exits.
According to Bain, deal value has fallen 60% since private equity’s peak in 2021. Deal count declined 35%, and exit value is down 66%. Buyout capital-raising has been flat since 2019, although limited partners are more inclined to allocate to established managers.
Private equity firms are also holding onto their portfolio companies for longer, specifically in regard to pre-2022 holdings acquired when valuations were higher. There are $3.2 trillion in assets that remain unsold, limiting distributions to general partners, according to Bain.
“Slower distributions have left LPs cash-flow negative, crimping their ability to plow more capital back into private equity,” the report states.
Still, Bain has an optimistic forecast for the asset class.
Light at the End of the Tunnel
The Bain report pointed to anticipated rate cuts as something that could spur dealmaking. PE firms could also start to deploy the large amount of dry powder that has been sitting around.
“The good news? Interest rates appear to be stable and have been for a few months,” wrote Hugh MacArthur, chairman of global private equity at Bain, in the report. “Record dry powder is stacked and ready for deployment. A sizable chunk of this dry powder is aging and needs to be put to work. Looking into portfolios, nearly half of all global buyout companies have been held for at least four years. In short, the conditions appear to be shifting in favor of hitting the go button. We will see what 2024 brings.”</P
According to Bain, 26% of dry powder in 2023, or $312 billion, is more than four years old.
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Tags: Bain & Company, cash flow, distributions, dry powder, Hugh MacArthur, Interest Rates, LPs, portfolio companies, Private Equity, valuations