Industry Trends
Private equity performance: A look at Q4 2023
It highlights the trends and expectations in the private equity (PE) market. In the first half of the previous year, the market was dominated by larger take-privates and smaller bolt-ons. As the year progressed, the market saw a rise in secondaries, carve-outs, and private-to-privates. Despite a fall in take-privates from their Q1 peak, there are still attractive targets available. For instance, Blackstone's acquisition of Adevinta for US$15 billion was one of the largest deals announced last year. As 2024 begins, market participants expect these deal types to continue. However, higher interest rates have made financing deals more challenging. In the US, the leveraged loan default rate is below its long-term average, but pressure is building across parts of the system. The S&P’s Weakest Link Index has grown by over 50% in the last 12 months, and interest coverage ratios have been falling. These dynamics present opportunities for PE firms with dry powder and the right expertise to assist companies through volatile macro periods. EY revealed that 63% of respondents expect an increase in distressed transactions over the next year. It is also anticipated an increase in secondary buyouts, with approximately US$1.3 trillion in PE dry powder available to fund new deals. Despite potential headwinds in 2024 due to high inflation, rising interest rates, and a potential macro slowdown, PE firms with capital to deploy should still find select opportunities, especially in distressed assets. To conclude, 1. The year closed on a strong note, with firms announcing deals valued at US$124 billion, making it the most active quarter of the year by value. 2. PE remained resilient in 2023, as firms opportunistically deployed capital across a range of verticals, asset classes, and transaction types. 3. Higher interest rates will continue to elevate the value of operational value-add.
Source: EY
Understanding the dynamics of the alternative investment market
There is a growing trend of alternative investments, which is expected to reach $21.1 trillion by 2025, according to PwC. The democratization of alternative investment opportunities, such as crowdfunding and private lending, has made it easier for individuals to diversify their portfolios. Investors are also looking for unique opportunities, such as backing companies that adapt to technological changes. However, alternative investments come with unique challenges, including reporting, liquidity, and taxes. Reporting in the alternative market often lacks transparency and can lag behind. Liquidity can be tied up for longer periods in alternative investments, and taxes can pose challenges as alternative investments are usually categorized as K-1 investments. Despite these challenges, alternative investments offer unique opportunities for savvy investors, especially with proper planning and understanding of the market trends.
Source: Forbes
Anticipated shifts in private credit for 2024
It highlights the trends that are expected to impact private credit in 2024. Firstly, the resilience of the Australian economy in 2023 is expected to lead to delayed financial stress and volatility in 2024 due to factors like high interest rates and unsustainable short-term tailwinds. Secondly, traditional lenders are expected to tighten their risk parameters due to increasing stress and volatility, leading to a diminished supply of capital. Thirdly, this will lead borrowers to seek funding from flexible private credit providers, creating opportunities for investors. It also mentions strong opportunities in sectors like financial services and commodities. Fourthly, mergers and acquisitions activity is expected to surge in 2024, driven by growing market comfort around valuation and cost of capital adjustments. Lastly, private credit is expected to become a larger asset class in Australian portfolios due to strong demand and investor support. It concludes by stating that private credit will continue to emerge as a crucial player in Australia's economic landscape and suggests three factors for strong returns: a catalyst creating opportunity, an investment manager with the necessary capabilities, and a creditor able to deploy liquidity.
Source: Livewire
Market Sentiments
Navigating the future of private equity with the voice of the new generation
Danai Musandu, Vice President of Investor Relations at HPE Growth, discussed the transformative shifts in the private equity (PE) industry at the Superinvestor conference in Zurich. She highlighted a generational shift in PE funds, influenced by cultural icons like Kim Kardashian and Serena Williams, and the emergence of younger capital managers. Impact investing, democratization of access to capital markets, and tech entrepreneurs shaping investments were also noted as key areas of this shift. Musandu emphasized the role of AI and decentralized finance (DeFi) in eliminating middlemen and increasing transparency in investment processes. She also mentioned the rise of in-house fundraisers and growing retail investors participating in private markets.
Discussing the influence of cultural icons in finance, Musandu acknowledged the role of platforms like TikTok in democratizing financial knowledge. She predicted the emergence of new influencers and financial experts, and the rise of branded/celeb crowd-funding platforms. On the topic of AI in deal sourcing, Musandu revealed her team's exploration of upstream opportunities with AI assistance. She also discussed the need to refine the lens of impact investing, considering metrics like External Rate of Returns (ERR) and equitable access as indicators of success. Regarding her team's tech and analytics approach, she mentioned a combination of buying, building, and customizing tools. Finally, for the outlook for 2024, she anticipates market consolidation, creativity in structures, opportunities for purpose-driven firms, and the entry of more celebrity-type investors.
Source: Forbes
After a turbulent few years, venture should steady in 2024
The venture market has experienced significant fluctuations over the past few years, with 2024 viewed optimistically by venture capitalists. They believe that the market has been right-sized and that the exit markets are recovering. Despite potential challenges, such as start-ups closing and layoffs continuing, investors are hopeful that the difficulties of the past years are largely behind them. Mark Sherman, managing director at Telstra Ventures, predicts that seed and early-stage rounds will not decline much further, but growth rounds will likely move with the public equity market. The public markets could be a significant variable for venture this year, with M&A activity expected to increase. However, the AI market may slow down due to high valuations and potential legal and regulatory issues. Layoffs and closures are expected to continue as companies aim to reach breakeven. The venture industry itself may also see changes, with many new firms struggling to raise new funds. Despite these predictions, unexpected factors such as geopolitical issues and inflation could disrupt the private market. However, investors remain hopeful that 2024 will bring improvements.
Source: Crunchbase
Beyond corporate credit: Exploring asset-based finance for 2024
The asset-based finance (ABF) market, estimated at $5 trillion, covers a wide range of assets from consumer loans to music royalty contracts. Despite its size, not much capital has been raised in this space. The largest part of the market is consumer and mortgage finance, with other sectors including commercial loans and contractual cash flows. In 2023, despite concerns about a hard landing and asset price movements, the ABF market saw increased activity. Opportunities have arisen due to disruption in the banking sector, with regional banks selling assets that are generally performing. Deals have been made in Europe providing capital relief solutions to banks. Looking ahead to 2024, the approach to investing in the ABF market will continue to evolve, with a focus on relative value across sectors and geographies. Risks include higher rates and inflation impacting consumers globally. The perception of ABF has changed over the past few years, with more investors looking to increase their private credit allocations. The top reasons for investors to pay attention to ABF in 2024 include diversification and the fast-growing nature of the market.
Source: KKR
Market Opportunity/Challenges
The future of private markets in 2024
The past year has seen high inflation and interest rates, challenging geopolitics, and slow fundraising and deal volume in private markets. Here are the key considerations for organizations in the new year include:
- A return to a more normal year in dealmaking with continued growth.
- Fundraising will remain tough due to the 'numerator' effect.
- Continued concentration among larger and better-known names in the industry.
- Value creation is the 'new old thing', with transformative change boosting value.
- Evolving talent challenges, including efforts to improve diversity, equity, and inclusion.
- Creative sourcing strategies, with more-willing sellers in family-owned businesses and corporate carveouts.
- Acceleration in infrastructure investing, driven by an expanding definition and growing maturity of the asset class.
- Private credit continues to accelerate, with opportunities to put capital to work being numerous.
- Real estate deal volume is expected to pick back up, with rents likely to stabilize across sectors.
- Growth in secondaries, enabling liquidity for GPs and LPs.
Source: McKinsey & Company
What to expect in private equity and venture capital in 2024
It discusses the potential trends in Private Equity (PE) and Venture Capital (VC) for 2024. Despite a challenging 2023, it predicts a rebound in the U.S. VC fundraising environment due to encouraging economic indicators, including a potential decrease in interest rates and lower expected volatility. However, it also highlights risks such as valuation corrections and the struggle of unicorns to turn profitable. It suggests that 2024 will see an increase in U.S. VC insider-led deals, providing VCs with more ownership in their portfolio companies. Private equity secondaries are also expected to rise to a record high in 2024, driven by the need for liquidity among LPs. It also emphasizes the importance of investing in diversity, despite recent setbacks in DEI initiatives. It expresses hope that investors will continue to see diversity as a fruitful investment opportunity.
Source: Nasdaq
Resilient private credit fills a growing need
The US and European private credit markets have seen significant growth over the last decade, with private credit players regularly financing multi-billion-dollar debt structures. This growth has been fueled by a supply/demand imbalance for credit, increasing capacity of private lenders, and greater efficiency of private alternatives. The Global Financial Crisis and subsequent market downturns have further highlighted the appeal of private credit as an asset class. The industry has also benefited from the lack of dependency on ratings agencies. Despite macroeconomic challenges such as inflation and the Ukraine war, private credit has continued to grow, taking more share from banks and liquid markets. Private credit managers are able to extract better terms and pricing with more diligence than their liquid market counterparts. The industry is expected to continue growing, with private credit well-positioned to take a significant share of the $370 billion of liquid market issuance seeking refinance over the next few years. Despite potential challenges, private credit has proven its resilience and offers attractive returns over the long term. The asset class is expected to demonstrate strong growth for many years to come.
Source: Asian Investor
Private credit outlook: Evolution and opportunity
The upcoming global Basel III regulations, effective in 2025, will require banks to revise their risk-weighted asset framework, potentially leading them to reduce lending and offload existing loans. This situation presents opportunities for private lenders to partner with banks and acquire loans that meet specific credit requirements. The macroeconomic environment in 2024 may pose challenges, with high central bank interest rates and signs of slower growth in the US and Europe. However, private credit transactions, which involve direct origination, negotiation, and structuring, can help manage potential issues. The year 2024 could see a rise in asset-backed lending strategies or "specialty finance", which involves non-bank lending against pools of assets or receivables. These strategies can offer strong returns and diversify portfolios. Direct lending, a significant part of the US private corporate credit market, will continue to be crucial in private asset allocations. The commercial real estate market, which was restrained in 2023, may see increased activity due to potential stability in interest rates. This could lead to higher transaction volumes and price discovery across property types. Private lenders could benefit from opportunities created by maturing loans held by banks. The global energy transition will continue to offer attractive opportunities for private lenders in renewable energy projects. Despite potential economic slowdown, yields are expected to remain above pre-pandemic lows, and deal terms across asset classes are likely to stay favourable. Thus, 2024 could be a good time to invest.
Source: Alliance Bernstein
What's in store for PE in 2024: Insights from PitchBook
As 2024 begins, PitchBook analysts predict several trends in the private equity (PE) market. Continuation funds, which provide liquidity and allow PE firms to recapitalize old funds, are expected to flourish, with the number of continuation vehicles likely to surpass 100. This is due to the growing pressure on General Partners (GPs) to return capital to investors and the large amount of capital accumulated by funds targeting PE secondary transactions. PE funds are also expected to hold onto their investments longer due to a misalignment between transaction volume and exit rate, leading to a backlog of PE assets. The median holding period for a portfolio company in a PE fund is predicted to reach 4.4 years. Fundraising is expected to be lean in 2024 due to a slowing pace of distributions resulting from a sluggish exit environment. The total value of PE-backed exits dropped by 26.6% year-over-year to $574.2 billion in 2023, the lowest since 2012. This could slow buyout fundraising to its slowest pace since 2019. However, if the IPO market reopens and M&A activity rebounds, buyout firms could see money flow back.
Source: Pitchbook
Sector Update
Healthcare private equity market 2023
The healthcare sector remained a significant area of private equity (PE) deal activity in 2023, despite global economic challenges. Biopharma deals and related services made up the largest share of global deal value at 48%. Six deals exceeded $2 billion, with the largest being the privatization of Syneos Health. North America had the highest value of healthcare deals, with biopharma accounting for 25% of deal activity and 54% of deal value. In Europe, deal value fell by 44% due to constrained credit markets and inflation. Asia-Pacific saw slightly lower deal activity, but India emerged as a significant player in the healthcare market. Fund sponsors faced challenges in 2023 due to decreasing exit volume and increasing competition for fresh capital. They responded by investing in value-creation opportunities and exploring secondary transactions. Corporate M&A value in healthcare increased from 2022, with Pfizer's acquisition of Seagen being the largest. Despite macroeconomic headwinds, healthcare PE has shown resilience, with innovation triggered by the pandemic leading to new healthcare delivery models and life-sciences capabilities. It concludes by posing questions for investors to consider for 2024 and beyond.
Source: Bain & Company
The 2024 outlook for private equity in US healthcare
There is an optimistic outlook for transaction volumes in the healthcare sector, driven by strong market fundamentals and the convergence of buyer and seller valuation expectations. It highlights the key trends that investors need to consider for their 2024 investment strategies. These include continued labor shortages, implementation of the Inflation Reduction Act (IRA), evolving regulatory landscape, and deployment of traditional and generative AI. It also discusses the challenges faced by healthcare organizations, such as staffing shortages, rising labor costs, inflation, and supply chain disruption. It suggests that organizations will focus on maintaining or increasing their profitability through operational improvements, innovative use of technology, and portfolio reshaping. It also mentions the potential of AI in administrative functions and clinical support. It concludes by discussing the evolving commercial insurance landscape, the impact of the IRA on the biopharma segment, and the expanded use of AI in imaging, robotic surgery, and implant manufacture. It suggests that these trends and challenges present opportunities for investors in the healthcare sector.
Source: BCG
ESG Scope/ Trends
Unlocking ESG value with climate tech
Private equity firms play a pivotal role in addressing climate change and the importance of Environmental, Social, and Governance (ESG) pillars in their operations. To limit global warming to 1.5°C above pre-industrial temperatures by 2030, a $32 trillion investment in decarbonization is needed, with private investors expected to finance 70% of this. PE firms are increasingly integrating ESG into their strategies, with a focus on decarbonization and ESG reporting. It also suggests a roadmap for ESG transformation, including setting a vision, developing a strategy, and conducting current state assessments. Medium-term steps include defining baseline greenhouse gas emissions and creating a due diligence framework that incorporates ESG into the deal lifecycle. Long-term steps involve implementing ESG technology solutions and launching an ESG monitoring and reporting process. It emphasizes the importance of aligning business decisions with ESG initiatives and commitments and offers key takeaways to guide this process. It concludes by highlighting the potential of ESG to add value at every point of the business cycle.
Source: KPMG
