Private equity funds have cashed out only half the typical value of investments they usually sell in 2024, marking the third consecutive year of reduced payouts due to a lack of deals, according to a report by the Financial Times.
Normally, buyout firms sell about 20% of their investments annually, but industry leaders now predict that this year’s payouts will be around half that amount.
Cambridge Associates, a prominent advisor for large institutional investors in private equity, estimates that funds have fallen short by approximately $400bn in payouts to investors over the past three years, compared to historical norms.
This data highlights the growing pressure on firms to find ways to return cash to investors, including increasing the number of exits in the coming year. Since early 2022, dealmakers have struggled to strike deals at favourable prices as rising interest rates inflated financing costs and lowered corporate valuations.
Industry experts anticipate that M&A activity will pick up in 2025, potentially helping private equity firms address a massive backlog of $3tn in aging deals that need to be sold in the coming years, according to consultancy Bain.
Several large public offerings in 2024, such as those from Lineage Logistics, Standard Aero, and Galderma, have boosted private equity executives’ confidence in taking companies public. Additionally, the election of Donald Trump has added optimism to Wall Street.
However, Andrea Auerbach, global head of private investments at Cambridge Associates, warned that the industry’s challenges could take years to resolve. “There is an expectation that the wheels of the exit market will start to turn. But it doesn’t end in one year, it will take a couple of years,” Auerbach said.
To return capital to investors in the meantime, private equity firms have increasingly turned to continuation funds, where one fund sells stakes in portfolio companies to another fund managed by the same firm.
Jefferies forecasts that continuation fund deals will total $58bn in 2024, a record 14% of all private equity exits, up from just 5% in 2021.
Some investors, however, are sceptical about the industry’s ability to sell assets at current valuations. “You have a huge amount of capital that has been invested on assumptions that are no longer valid,” a large industry investor told the Financial Times.
Many buyouts made in 2021, when interest rates were low, are carried at inflated valuations on firms’ books.
Goldman Sachs recently reported that private equity asset sales, which used to be conducted at a premium of at least 10% above funds’ internal valuations, are now often being sold at discounts of 10-15%.
“[Private] equity in general is still over-marked, which is leading to this situation where assets are still stuck,” said Michael Brandmeyer of Goldman Sachs Asset Management.
