Industry Trends
A glimpse into the future: The 2024 Private Equity and Venture Capital scene
As the fast-paced, constantly changing market environment persists, this report is designed to help private market participants assess their positions alongside their peers and navigate the year ahead.
- GPs are notably more optimistic about deal activity in 2024, with 60% expecting an improvement, compared to just 34% last year.
- Mid-tier and smaller PE firms are likelier than their larger peers to believe deal activity will increase this year.
- Most VC professionals expect deal activity to improve in 2024 (68%), but a substantial number of respondents (38%) say conditions will stay the same as in 2023.
- Valuation volatility and buyer/seller misalignment have been the primary challenges in closing deals over the past 12 months.
- Artificial intelligence may have a future role in deal sourcing and target selection: 54% of GP investment professionals expect it to influence those workflows. However, for now, fund managers still prioritize personal networks and referrals as their foremost source of investment opportunities, closely followed by relationships with investment banks and brokerage firms.
- Among PE GPs, 37% of respondents reported expanding their use of private credit in deal financing during the past year, with larger PE firms making more use of private credit over bank loans.
- 61% of LPs investing in private markets reported they will increase their asset allocation to private credit in 2024.
- PE GPs feel the fundraising outlook has bottomed out: only 15% of GP respondents expect deteriorating fundraising conditions in 2024 versus 45% at the start of 2023. However, there are remaining concerns among VC firms about LPs reducing their venture allocation.
- Nearly three-quarters of LP respondents agree that a fund's investment strategy and the track record of the GP are the most important considerations when evaluating PE funds.
- PE was selected by the largest share of LPs (39%) as most likely to outperform other private asset classes in 2024, but this share fell from 2023 (52%). VC and private credit both benefitted from an optimistic sentiment shift for 2024.
Source: S&P Global Market Intelligence
2024 Asia Pacific Private Equity Almanac
The Deloitte Asia Pacific Private Equity Almanac provides a comprehensive overview of Private Equity activity in the Asia Pacific region for 2023 and explores likely trends for 2024. The report highlights the significant role of PE in the health and growth of economies, particularly in the Asia Pacific region. A key finding is the disproportionate share of PE dry powder in Asia Pacific relative to the region's PE volumes. Specifically, Asia Pacific PE dry powder accounts for 23.7% of the global total, while Asia Pacific PE deals only makeup 15.2% of global PE deals in 2023. This discrepancy indicates an increasing momentum of PE capital deployment in the region. The Deloitte Asia Pacific Private Equity Almanac attempts to overcome many of the shortcomings of this incomplete data to provide the most insightful view possible of the buyout market. It reflects commentary and market insights based on our close market coverage throughout the year. Trends and statistics are checked against and supported by Deloitte's proprietary database of portfolio holdings for PE funds in Asia. The scope of the Almanac is limited to buyout PE funds and their transactions (i.e., traditional buyout funds, focused on control deals), and as such, transactions deemed to be made by venture, growth, infrastructure, or real estate funds have not been included. Its geographic coverage spans PE activity across Asia Pacific: China, Japan, Korea, Australia and New Zealand, South Asia, and Southeast Asia.
Source: Deloitte
Understanding Private Credit: An exclusive European perspective
The analysis provides insights into the current optimism surrounding the US economy, predicting multiple Fed rate cuts in 2024. This has led to a bullish outlook for investors and a surge in equity markets, consequently reviving the syndicated markets for leveraged credit, particularly in Europe. Private credit funds have seen rapid growth, with businesses considering refinancing their borrowings with cheaper debt available in public markets. The piece also explores the concept of the "non-call period" in private credit financing and addresses concerns of lenders committed to financing a deal that has not yet closed. It further examines strategies for lenders to protect themselves, including formal contractual exclusivity, economic disincentives, and non-binding forms of "soft comfort."
Additionally, it discusses common misconceptions about debt commitment letters and the concept of exclusivity. In conclusion, it underscores the highly relationship-driven nature of the private credit market, with approaches varying from deal to deal. However, given recent macroeconomic factors reigniting competition within the leveraged finance market, private credit lenders are prioritizing the execution of any transaction for which they have a binding commitment.
Source: JD Supra
Deciphering the global trends in Private Debt and Equity
The high macroeconomic uncertainty of 2023, continuing into 2024 and 2025, suggests ongoing challenges in private corporate financing. The year 2022 started with a vibrant private market fundraising and dealmaking scene, only to see a deceleration as inflationary pressures led central banks to hike interest rates. Entering 2023, economic and geopolitical turbulence further strained the private assets landscape. Increasing corporate financing costs and uncertain revenue expectations have prompted investors to reduce liquidity risk, leading to declining fundraising for private assets throughout 2023.
- High inflation and escalating interest rates have tempered enthusiasm in private markets.
- Easing monetary policy and modest growth are expected to renew interest in private markets.
- Private debt as an asset class grew by 60% to USD 1.6 trillion in the last five years, transforming a niche financing option for small and medium-sized enterprises (SMEs) into a crucial element of the alternative investment scene.
- Economic downturns and regime changes often create opportunities in private markets, particularly for distressed debt.
- Despite recent market volatility, Private equity continues to scout for transformational growth agents like AI, ESG, healthcare, platforms, and reshoring.
- As private assets become more accessible and widespread, the distinct behavior of liquid and private assets will blur, potentially reducing the liquidity premium associated with private markets.
Source: Allianz Trade
Quarter Review
Insights from Q1 2024: Private Equity pulse
Sentiment continued to rise amongst PE dealmakers in Q1, driven by greater macro clarity, increased visibility into interest rates, and a sense that the valuation gap – one of the primary impediments to dealmaking in recent quarters – continues to resolve. Nonetheless, announcements remain markedly uneven. It's becoming increasingly clear that while the PE market will continue to recover over the balance of the year, its path will be nonlinear. Though tech still dominates sectors, its investment percentage of total deployment dipped slightly in the last 12 months. Rising activity in coming quarters will be boosted by greater availability of financing.
- Interest in taking privates and carve-outs remains high
- GPs continue to expect an increase in deployment
- Sponsor-to-sponsor deals see uptick amid continued exit drought
- Outlook – rate trajectories could impact deployment activity
As macro uncertainty eases, market conditions prime for more activity. However, firms will remain conservative in underwriting potential transactions to ensure value-creation plans support rate variations.
Source: EY
Market Sentiments
Navigating the shifting landscape of Private Equity business development
The private equity industry faced significant challenges in 2023, with deal activity dropping to $850 billion, the lowest level since 2013. This was due to rising interest rates, recession fears, and company performance. Despite this, some deals closed at high valuations, showing the complexity of the market. To succeed in 2024, technology, data analytics, AI, and machine learning are crucial for identifying investment opportunities and tracking trends. However, the importance of relationship-building remains unchanged, as it is a decisive factor in securing investment opportunities and achieving successful financial outcomes. The future of the private equity sector will be defined by the ability to adapt, leverage technology, and maintain strong relationships. Novacap emphasizes the importance of technology and data analytics, along with the value of human relationships, in navigating the complexities of the market.
Source: Middle Market Growth
Private Credit: Compelling reasons to consider despite the noise
Despite negative chatter surrounding the sector, this piece presents a confident perspective on private credit, straightforward lending. The authors argue that concerns about the industry are exaggerated. They point out that the total direct loan market, often cited as $1.7 trillion, includes dry powder and other specialized strategies. Focusing solely on the United States and excluding dry powder, they estimate outstanding direct loans in the U.S. to be $475 billion. This indicates that the leveraged debt ecosystem hasn't expanded too rapidly for the corporate sector. The piece also discusses the median interest coverage ratio, a gauge of financial health. The information is provided through qualitative analysis and isn't intended as a recommendation to invest in any specific asset class or strategy. The authors note that their assumptions, opinions, and estimates are illustrative only and subject to change without notice. They also caution that the model can't fully anticipate the impact of economic, market, and other factors on the implementation and ongoing management of an actual investment portfolio. The conclusion serves as a reminder that any views, strategies, or products discussed may not be suitable for everyone and are subject to risks.
Source: J.P.Morgan Private Bank
The alternative truth of Private Equity and what that means for asset allocation
The analysis explores the role of Private Equity (PE) as a diversifying alternative to public equity, questioning whether the 'alternative' label indeed ensures the anticipated diversification benefits. Comparing the characteristics of private equity and public equities provides insights into the potential effects of performance smoothing on PE investments. Introducing the concept of 'desmoothing' proposes a method to reverse the smoothing process applied to private asset valuations, thereby offering a more precise portrayal of PE risk. The desmoothed outcomes suggest that broad PE might not provide genuine diversification against long-only public equities.
Furthermore, it discusses the recent trend in asset allocation, transitioning from the traditional 60/40 portfolio to a 50/30/20 allocation due to escalating correlations between asset classes. However, a 50/30/20 portfolio with PE as the alternative could potentially heighten equity exposure rather than reduce it, thus undermining the diversification objective. In conclusion, it underscores the significance of quantitative analysis over labels in evaluating diversification potential.
Source: Institutional Investor
Market Opportunity/Challenges
Private equity steps in as demand for satellite data grows
In 2023, private equity supported nearly half of all deals aimed at satellite companies, marking the largest share of satellite industry investment volume since at least 2019. This was driven by national security concerns, improved industry economics, and the growing demand for satellite data from commercial and government clients. However, the announced value of these deals dropped significantly, with investments totaling $1.19 billion in 2023, down more than 87% from $9.48 billion in 2022. Despite this, the sector remains attractive to investors due to consistent government demand for satellite data and the potential for revenue generation. Examples of significant deals include the private acquisition of OHB SE by KKR & Co. Inc. and the purchase of Maxar Technologies Inc. by Advent and British Columbia Investment Management Corp. for $4.2 billion in December 2022.
Source: S&P Global Market Intelligence
Bridging private equity's value creation gap
Private capital firms focus on two critical principles for maximizing operational value creation. The first principle emphasizes the necessity of a rigorous approach to evaluating top-line and operational efficiency, involving actions to enhance EBITDA margins and growth rates and monitoring asset performance. The second principle stresses the importance of everyone understanding and contributing to operational improvements, linking talent to value, and empowering leaders to execute plans and refine processes. Additionally, it underscores the need for operational diligence in assessing new assets and monitoring existing ones. Managers should have in-depth familiarity with company operations and use key performance indicators aligned with the fund's investment thesis. Managers are also encouraged to reassess their operations and adopt a model promoting increased engagement with portfolio companies. The ultimate goal is to create operational improvements in existing and new assets.
Source: McKinsey & Company
ESG Trends
Unlocking value in ESG-enabled sectors for Private Equity investors
Environmental, social, and governance (ESG) principles' increasing significance shapes the socioeconomic landscape. Assets managed by ESG-focused funds are rising due to new regulations, shifting consumer preferences, and technological advancements. Private Equity firms need to invest in ESG-enabled sectors and companies. Three sectors are most attractive for investors: ESG services, software as a service (SaaS), clean technology, and green mobility. These sectors benefit from regulatory support, significant players, rising deal activity, and robust growth trajectories. The ESG services and SaaS sector offers sustainability-enabled technology solutions and is in growing demand due to regulatory and corporate focus on sustainability. Clean technology, aimed at reducing waste and pollutants, is driven by regulatory support and technological progress. Green mobility, focusing on reducing carbon emissions and promoting sustainable transportation, is shaped by global sustainability push, technological advances, and shifting consumer preferences. It concludes that Private Equity investors have significant opportunities in ESG-focused sectors.
