The $3tn hangover

Anyone who follows what is happening in the private and public markets will have seen the piece in the Financial Times that private equity groups globally are sitting on a record 28,000 unsold companies worth more than $3tn.  The numbers, revealed in consultancy firm Bain & Co’s annual private equity report, show how rapidly the industry has grown over the past decade, as well as the challenges it faces from higher interest rates that have increased financing costs.

These figures don’t really come as a surprise. 2023 marked the second straight year of lower deal volumes for private equity, following the record-breaking activity of 2021 as businesses emerged out of the pandemic. Unsurprisingly, private equity firms have been unsatisfied with the exit opportunities in the current landscape, with lower-than-expected valuations, and therefore, have opted to hold their portfolio companies for longer — further depressing deal volume.

According to Pitchbook, the median hold time for US private equity investments in 2023 was at an all-time high of over 6.4 years,. Assets are now increasingly held longer than the usual five years because exits need to be at an acceptable valuation, which has proved challenging.

Heading into 2024, and with Q1 nearly behind us, the industry faces continuing uncertainty. Inflation, interest rates, depressed deal appetite, and geopolitical tensions, are recurring themes across media coverage and in conversations with partners at leading private equity firms.

According to Preqin, PE firms have amassed a record amount of cash to spend on buyouts — an estimated US$2.1 trillion of dry powder as of December 2023. There will be increased pressure to put this war chest to work as we move further into 2024.

But there are several signs suggesting private equity M&A deals could be positioned for a rebound. M&A activity is starting to pick up again, signaling an end to one of the worst bear markets in a decade. Rising markets and expected rate cuts have at last put IPOs back on the menu. Europe’s IPO market is off to a great start (albeit not London) with more listings in the pipeline. Take-private deals are also on the rise and PE firms, who to date have been very secretive, are finally starting to put communications at the heart of deal-making.

The challenging fundraising environment of 2023 has highlighted an imperative for firms to actively engage with market participants Effective communication during M&A is essential, not only to ensure the success of the transaction but also to ensure employees have what they need to continue performing at their best, despite the changes that are underway.

This pre-positioning activity is now arguably the most important part of a transaction. Proactive communications can be the “bridge” that helps drive credibility and alignment in valuation levels – ultimately helping the owners of PE assets move closer to their “ideal” exit outcome.

In line with the positive early signals across Q1 M&A trends, we (as communications advisers) are geared to ride the M&A “wave” that may eventually help cure that $3tn hangover.