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Private equity funds cashed in just half the value of the investments they typically sell in 2024, with investors spending less than expected for a third straight year as deals dried up.
Buyout firms typically sell 20% of their investments in any given year, but industry executives predict cash outlays this year will be about half that amount.
Cambridge Associates, a leading advisor to large institutional private equity investors, estimates that funds have paid out about $400 billion less to investors over the past three years compared with historical averages.
The figures underscore growing pressure on companies to find ways to return cash to investors, including exiting more investments in the coming year.
Businesses have been struggling to strike deals at attractive prices since early 2022, when rising interest rates sent financing costs soaring and business valuations falling.
Dealmakers and their advisers expect M&A activity to accelerate in 2025, which could help the industry grapple with what Bain & Co. calls a $3 trillion backlog of aging deals that must be sold in the coming years. The “huge backlog” problem.
Several large public offerings this year, including food shipping giant Lineage Logistics, aviation equipment specialist Standard Aero and dermatology group Galderma, have given private equity executives the confidence to take companies public, while the election of Donald Trump has added to the Wall Street boom.
But Andrea Auerbach, global head of private investments at Cambridge Associates, warned the industry’s problems could take years to resolve.
“The wheels of exit are expected to start turning. But it won’t be over in a year, it will take several years,” Auerbach said.
Private equity firms have used novel strategies to return cash to investors, but selling their holdings has proven difficult.
They are increasingly using so-called continuing funds, in which one fund sells stakes in one or more portfolio companies to another fund and then to another fund managed by the firm, to engineer exits.
Jefferies predicts that continuing fund transaction size will reach US$58 billion in 2024, accounting for 14% of total private equity exits, a record high. Jefferies found that such funds accounted for just 5% of all exits during the boom year of 2021.
But some private equity investors are skeptical the industry can sell assets at anywhere near the funds’ current valuations.
One large industry investor told the Financial Times: “A lot of money is being invested based on assumptions that are no longer valid.”
They warned that acquisitions hit a record of more than $1 trillion in 2021, just before interest rates rose, and that valuations on many deals were too optimistic.
Goldman Sachs recently pointed out in a report that private equity asset sales have historically been conducted at a premium of at least 10% to the fund’s internal valuation, but in recent years they have been conducted at a discount of 10% to 15%.
“[Private] “Overall, equity remains too high, which results in assets remaining distressed,” Goldman Sachs Asset Management’s Michael Brandmeier said in a note.
