As the private capital sector continues to experience decreased dealmaking activity, general partners (GPs) and operating partners (OPs) grapple with heightened responsibilities and stretched resources. This blog delves into the current state of the sector, highlighting the challenges posed by a lack of exits and its impact on key players. It also provides valuable insights into what industry leaders expect in the coming years, including the likelihood of market recovery in 2025.
Reflections on the Current Private Capital Landscape
The private capital markets landscape is complex and dynamic, demanding a keen understanding of its ever-evolving nature. Several key themes have emerged in the contemporary scenario, including low exit activity, increased deal value, and extended deal timelines. These themes represent significant challenges and opportunities for investors and fund managers alike, shaping the direction of the private capital markets.
Our PCG team gleaned valuable insights from Bain & Company’sSearching for Momentum: Private Equity Midyear Report 2024which provides a comprehensive analysis of the prevailing market conditions and trends. This report reflects on data and polls collected by their team and builds off their March webinar on the same topic. Some of the biggest takeaways for our team included:
Decreased Exit Activity and Extended Deal Timelines
As referenced in the Bain & Co. report, private equity deal activity is down markedly in terms of exits primarily due to prolonged exit timelines and challenged macroeconomic conditions. Rising interest rates, inflationary pressures, and market volatility have significantly hampered the ability to achieve timely exits, with many firms opting to hold portfolio companies longer in anticipation of better market conditions and returns.
The extended time to exit has become a defining feature of today’s private capital markets. The Bain report highlights a significant increase in average deal duration, driven by market volatility, regulatory hurdles, and more stringent due diligence. These longer timelines are reshaping investment strategies, forcing firms to adapt their approach while managing the impact on returns. As a result, operating and general partners find it necessary to recalibrate their investment planning and the expectations of limited partners who are increasingly concerned about prolonged capital commitments.
There is growing frustration amongst limited partners (LPs) due to the lack of exit activity. The lengthened timelines have caused tension between LPs and funds as LPs begin to demand a return on their investment. As investors, LPs have one thing on their mind: getting their money back in their pocket with significant returns as efficiently and effectively as possible. Longer deal cycles mean extended hold periods for LPs that may be looking to redeploy these assets to other resources. LPs are not the only ones frustrated by these challenges caused by current market conditions, as general partners (GPs) and operating partners (OPs) have both dealt with increased responsibilities due to the lack of exits and offloading of portfolio companies.
Managing Increased Responsibilities Amidst Slow Exits in Private Capital
According to the Bain & Co Mid Year webinar, GPs and OPs are now managing twice the number of portfolio companies on average, compared to previous years. Inefficient exits and steady investment into new portfolio companies have caused a surge in operational oversight requirements. OPs and GPS have been stretched thin
As exits become less frequent, both GPs and OPs are compelled to focus heavily on value creation within an increased number of portfolio companies. GPs and OPs have been ineffective in achieving return goals set forth by the PE firms, forcing funds to retain mature investments for a longer term, now up to 12 years. While exits have slowed, funds have continued to make new investments bringing with it a host of challenges, including the need for deeper engagement in governance, talent management, and long-term strategic planning at more companies.
GPs and OPs eagerly anticipate a recovery in the dealmaking market, and the community is optimistic that it isn’t too far off the horizon. This anticipated upturn in M&A activity and exit opportunities is seen as the much-needed relief valve for partners whose resources are stretched extremely thin. Recover is near, but until then, GPs and OPs will continue shouldering the burden of growing responsibilities while staying nimble and creative in the face of adversity.
Deal Value Remains Consistent Despite Challenges
Despite the decrease in exits and extended timelines, overall deal value in the private capital market has remained remarkably consistent with previous years. This resilience is largely attributed to the higher valuations being achieved across the board, as private equity firms focus on quality assets with strong growth potential. Even with fewer exits, the increased deal values have counteracted the slowdown, enabling firms to maintain strong portfolio performance.
For operating and general partners, this dynamic reflects a shift towards a more selective approach, where fewer deals result in higher-quality transactions. While limited partners may express frustration over delayed exits, the sustained deal value underscores the long-term growth prospects that continue to drive the market.
Looking Ahead to 2025
As we approach the start of 2025, global uncertainty and conflict continue to shape the economic landscape. While private capital markets may seem somewhat insulated from a broader economic slowdown—benefiting from attractive buy-side valuations and selective sell-side opportunities—executives are still grappling with critical questions: How will the upcoming U.S. election influence the markets? What will be the economic impact of ongoing conflicts in the EMEA region? When will deal activity return to previous highs? And what does 2025 hold for the industry? In this section, we’ll explore the global outlook and offer predictions for the year ahead.
Geopolitical Uncertainties & The Impact on Private Capital
The current geopolitical landscape presents a myriad of uncertainties that could seriously impact the private capital markets, most importantly affecting the feasibility of returning to normal deal activity and thus solving some of the challenges mentioned earlier. Geopolitical tensions, the specter of a potential recession, fluctuations in inflation and interest rates, as well as ongoing conflicts in Ukraine, Russia, Israel, and Palestine collectively contribute to an environment marked by volatility and unpredictability. These factors intertwine and exert profound effects on market sentiments, investment strategies, and the overall trajectory of the private capital markets.
Amidst these geopolitical tensions, the market is grappling with the looming specter of a potential recession, compounded by anxieties surrounding inflation and fluctuating interest rates. Such economic headwinds introduce a layer of complexity, influencing investor confidence and reshaping risk and return dynamics. Moreover, the ongoing conflicts in Ukraine, Russia, Israel, and Palestine inject an additional dimension of uncertainty, manifesting impacts that cascade across global markets. Furthermore, the upcoming US election is a focal point of uncertainty, transcending partisan lines and casting a shadow of ambiguity over market behaviors. The very fabric of market stability is tested as participants navigate this climate characterized by profound geopolitical and economic crosscurrents, requiring nuanced strategies to weather the storm and maintain resilience amidst prevailing uncertainties.
A Call for Cautious Optimism Heading into 2025
As we approach 2025, the private capital markets are showing signs of a much-anticipated rebound. An abundance of dry powder—capital waiting to be deployed—has positioned private equity firms for opportunistic buying as valuations stabilize. With a reset in market conditions, 2025 could present a window for value-driven acquisitions, allowing firms to capitalize on high-quality assets at more reasonable prices. While the market still faces uncertainty, these conditions offer a promising outlook for those able to navigate with care.
Deal activity is expected to begin a recovery by late Q1 or early Q2 of 2025. Private capital firms are preparing to act on long-delayed opportunities that respond to many of the issues facing LPs, GPs, and OPs. For private equity and venture capital firms alike, this may signal the beginning of a more active cycle as confidence slowly returns to the market. A gradual uptick in deal flow will likely be driven by strategic acquisitions and partnerships prioritizing long-term value.
Fundraising is anticipated to follow not too long after the rebound in deal activity. While the road ahead may not replicate the rapid post-pandemic surge, there is cautious optimism that 2025 will mark the beginning of a steady recovery. With an abundance of dry powder at their disposal, funds are less worried about a need for fundraising at this time. Once exit activity returns to the norm, LPs will have more funds at their disposal to reinvest within the market. All indications are that a recovery is coming in the not-so-distant future.
