15 Mar 2024

Ready to get back to business

Suzi Gillespie, BVCA Head of Research, takes a look at the findings from the 2024 Bain Global Private Equity Report

Stalled markets in 2023

Rising interest rates, geopolitical uncertainty, economic wobbles. 2023 was a tough year for private capital deal makers. The global buyout figures for 2023 vs 2022 are stark: deals down 37%; exits down 44%; fundraising down 20%.

For those of us old enough to remember, this has echoes of the aftermath of the 2008/9 Global Financial Crisis, when deal volumes shrank, liquidity disappeared, asset holding periods lengthened and returns took longer and were slightly lower.

And yet.

Despite the disruption, there is cautious optimism in the current investment climate. The world economy (particularly in America) has done better than expected. Private capital investors are savvier at working with portfolio companies to drive improvements. While banks have retrenched and are providing less capital, private credit has expanded to fill the gap, offering flexible terms to suit businesses needs.

The elephant in the room is of course the increase in interest rates – raising the cost of capital and consequently supressing valuations. Rates rose dramatically in the US between Summer 2022 and 2023 – a more than 500 basis point increase. The UK experience was less dramatic, with an increase of 100 basis points. There is no denying that this has presented challenges to businesses and investors, but it is something that large private equity investors are well placed to manage.

Global buyout funds currently have their largest investment portfolio ever – backing 28,000 businesses across the world. A testament to the returns and diversification offered by private capital versus other strategies such as public equities.

Exit opportunities slowed in 2023 – but won’t take much for the deal doers to start doing deals again if interest rates stabilise (or even better, drop a notch). After all, global dry powder is sitting at $1.2 trillion, and this is capital which needs to be put to work. We see confidence returning, although challenges remain.

The focus for 2024 – Value creation and innovation

So, how will private equity firms continue to demonstrate that they are trusted stewards of capital and companies?

Firstly, by doubling down on value creation – increasing productivity and expanding margins as well as driving top-line revenue growth. Evidence from the UK shows that PE firms drive productivity improvements in the businesses they back.

Secondly, and related, focusing on generating strong returns. Investors are placing a greater emphasis on liquidity and cash returns than in recent years – so buyout firms need to be really clear on their value creation plans and likely timeframes.

Thirdly, understanding investors needs and finding innovative solutions. Some investors want (or need) cash sooner than the optimal exit timing for an investee business, which is driving growth in secondary transactions, enabling some LPs to cash out sooner with others buying in to an established asset. Continual engagement with LPs is essential to understand their needs and to ensure that incentives are aligned.

And finally, no report these days can fail to mention generative AI, and this is no exception. AI is both an opportunity and a threat to businesses of all stripes. Private capital investors are actively reviewing the businesses they back to understand which might be disrupted and enhanced by AI - defining a strategy and pivoting if necessary.

Not easy, but not insurmountable.

Private equity and the businesses they back have demonstrated resilience through challenging times – from the post-9/11 recession to the Global Financial Crisis, and the pandemic. The rise of generative AI presents opportunities for improving investment processes, and the growth of private credit gives financing flexibility and innovative liquidity solutions which can help to meet investors needs while enabling long-term investment in businesses.

Authored by Suzi Gillespie
Head of Research, BVCA

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