Private Equity Deal Activity Should Accelerate in H2 – Right?

It should not be a surprise that transaction activity in the private equity industry has slowed in the past 12-18 months. On the buying side, higher interest rates have had the impact of making the debt that supports leveraged buyouts more expensive, reducing demand from buyout fund managers. On the selling side, PE shops looking to offload portcos have only brought assets to market that they felt would hold up from a pricing perspective, or if they had old vintage funds with very little assets left to liquidate.

The extent of the global pull back last year was stark: deal value was off slightly more than a third, and deal quantity fell a similar amount.

But when I saw this article from Bain & Company, even though it is three months old, one observation caught my eye; whether buyout firms will become forced buyers because of the age of the dry powder that have at their disposal.

As Bain & Co’s article suggests, the massive amount of dry powder – $1.2trn – in the PE space needs to find a home. Your typical ten-year PE fund invests in the first few years, holds in the middle and exits in the last few. Except that a quarter of the money currently on the sidelines is 4 years old or more, the highest percentage of the last 7 years (it’s the same for dry powder that is more than 5 years old).

With all this dry powder concentrating at the larger PE firms, you can imagine that the purchase multiples become much more competitive (higher) at the larger end of the spectrum. By contrast, for those focused on smaller companies and rollup strategies, this could be the best market for your exit.

The first quarter of this year delivered an uptick in deal value in buyout and VC circles, but only 3%, and the number of transactions fell, supporting the suggestion that only higher value assets with a stickier price point would see buyers signing on the dotted line. With more and more dry powder, these mega-PE firms need larger deals.

It will be interesting to see if the market moves more in the second half of this year. A Reuters poll in April said that the Fed will cut interest rates in September, which would likely move the activity needle due to higher investor confidence in the medium term. But then, that poll was actually more bearish when compared to the previous month, which had a two third majority suggesting that June would deliver the first rate cut since the current hiking cycle began.

And then, in November, the US has its Presidential election. Usually, Q4 sees good activity as firms look to complete deals in time for year end. But some investors might want to sit on the sidelines this year, playing it safe until they have more clarity around the political landscape of the next four years (which could make for a frantic November and December, however).

The large data companies that track the PE space usually publish their fundraising and deal data with a couple of months lag, so H2 data likely won’t be available until sometime in August. If activity has picked up in the second quarter, then I’d suggest that it would continue to do so through the balance of the year, as GPs look to deploy capital. If it doesn’t, then 2024 overall could end up being slower than 2023, which would be a surprise to just about everyone in the space.

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Gregory Poapst is a Managing Partner at Fundviews Capital. Connect with him on LinkedIn here.

Fundviews Capital is a full-service end-to-end Fund Management Platform.  Our platform provides a complete end-to-end solution for asset managers or wealth managers to structure, launch, operate and grow their professional investment funds. You can launch a fund in a matter of weeks, not months, and with minimal capital outlay – not only reducing the risk of launching a fund but also maximizing your chance of success. Once launched, you will find that a dedicated team of professionals is just a phone call or email away at all times, handling all aspects of the back and middle office for your fund.