Private equity: Reflecting on 2023 and anticipating trends for 2024.

Key Private Equity Trends Shaping 2023

Macro Uncertainty Impacting Investments

The first half of 2023 saw continued macro uncertainty, leading to a decrease in investments, exits and fundraising in the private equity industry.

Global Buyout Funds Facing Decline

Global buyout funds generated $202 billion in deal value in the first half of 2023, a 58% decline from the same period a year ago.

Private Capital Facing Challenges

The value of global private capital raised in the first six months fell to $517 billion, a 35% decline from the same period a year ago.

Resilience Amidst Turbulence

Despite rising interest rates, a banking crisis and geopolitical turbulence, nothing is fundamentally broken in the global economy. The S&P 500 and Nasdaq rebounded strongly in 2023 (November was a particularly strong month), opening up the IPO window for several private equity-backed companies.

Struggles for Cashflow Negative Companies

Cashflow-negative companies faced obstacles in 2023, while great assets continued to find buyers in a market where cashflow positivity was crucial.

Pressure on Returning Capital

Throughout 2023, the industry was under pressure to return more capital to limited partners due to 12 months of relative inactivity in 2022. It’s worth noting that buyout funds have a record $2.8 trillion in un-exited assets, causing a liquidity crunch for limited partners.

Innovative Capital Management Strategies

GPs have various methods of increasing distributions to LPs, including exits, GP-led secondaries, recaps or other liquidity solutions. One area where we saw a big uptick is in the number of continuation funds.

Effective Portfolio Management

The most effective GPs are finding ways to move aging assets off their books at acceptable returns while recalibrating how to drive value for the portfolio companies they plan to hold.

When we look ahead to 2024, we expect to see some of the positive signs of 2023 to continue. However – don’t think we’re out of the woods yet – there might still be more pain to come.

Private Equity Predictions for 2024

Operational Resilience at Portfolio Companies

Many portfolio companies, particularly those that prioritized growth over positive cash flow in 2020 and 2021, struggled in 2022 and 2023 as debt became more expensive. However, many of these companies have since worked diligently to cut costs and reach break-even. Moving forward, we expect these companies to require less financial support and to demonstrate to investors that new capital invested can generate profitable growth.

Stabilizing/Decreasing Debt Prices

Interest rates are gradually stabilizing or even declining in some countries. We anticipate this trend to continue into 2024, with most countries reaching a period of interest rate stabilization. We predict the EU, with its slower growth rate and cooler economy, will lower interest rates before the US, which currently boasts a more resilient economy.

More Distributions Across the Sector

Beginning in Q3 2023, we started to see an uptick in asset sales across the PE landscape. Whilst this is still largely restricted to the best-performing assets, many of which showed strong resilience to the wider market decline, we are seeing more movement across the general PE sector. We expect this will continue into 2024.

Fund Raising will Remain Challenging

Fundraising continues to remain challenging, especially for firms with limited track records or track records that show limited distributions. LPs expect to see strong IRRs, strong MOCs and more and more – strong DPIs.

Deepening LP-GP Relationships

Despite the challenges in fundraising, LPs report wanting deeper relationships with GPs, with commitments to a narrower selection of GPs and increasing co-investment opportunities.

ESG Initiative Push Back

ESG initiatives have widely been adopted across the private equity industry in various forms. However, some LPs are pushing back in certain areas – including where the sustainability initiatives look too much like greenwashing or where the financial performance is starting to dip.

Rising Regulatory Scrutiny

2023 was a big year for PE regulation, especially in the US where the SEC introduced new regulations focused on increasing transparency. The private markets are now so large that we expect regulators will continue to increase their focus in that sector. This will require additional work from GP’s investor relations teams and back-offices as they undergo the necessary preparations for these new rules.

SFDR Regulation Impact

This continues to drive capital flows. During 2023, Goldman Sachs saw 435 funds upgraded from Art 6 to 8 across equity and fixed income, representing $131bn in AUM. At the same time, the trend of “downgrades” away from Article 9 to Article 8 slowed, but still saw >50 funds move away from Article 9.