We’re still waiting for the long-anticipated PE exit recovery, but deal advisers tell me GPs are busy cooking up plans to offload their fully baked assets as pressure mounts to return capital to LPs.
Market chatter at the start of the year indicated the pipeline of exits was filling up, there were more assets up for grabs and the credit market had a strong appetite for financing high-quality deals.
However, more than halfway through the year, reality has fallen short of those predictions. Exits have not accelerated at the speed everyone hoped for. In fact, they’ve barely moved at all.
In the first half of 2024, overall US PE exit value reached $141.2 billion, almost flat from the year earlier; the total exit count showed only a slight year-over-year increase of 1%, PitchBook data shows.
Factors hindering the recovery in exit flow include a persistent valuation gap between buyers and sellers, election uncertainty and high interest rates.
Behind the scenes, though, these advisers note signs of increased activity around sale preparations, a motivation to close deals quickly and a willingness among sellers to take on more risk.
“There’s an increased eagerness and motivation to exit right now,” said Matthew Simpson, co-chair of the private equity practice at Mintz.
Short-order deals
Increasingly, PE managers are engaging with bankers and lawyers to initiate conversations with potential buyers. And there is a readiness to act quickly when prices are attractive and the chemistry between a buyer and seller is right.
In one case where a PE firm sold a software company to a strategic buyer, the process took only a couple of weeks from making the initial phone call to signing the purchase agreement, a legal adviser to PE firms told me. The remarkable speed reflected the seller’s eagerness to offload assets in a fund that was nearing the end of its life.
Buyer-friendly terms
Additionally, some sellers are prepared to accept greater deal risk when they are motivated to offload an asset.
“No-seller-recourse” deals, which were commonly seen in the seller’s market of 2021, are less frequent today. The structure limits a buyer’s ability to recover losses resulting from the seller failing to live up to the representations it made, say, to properly disclose financial liabilities.
Moreover, while there remains a valuation gap between what buyers and sellers generally think assets are worth, the latter are becoming more realistic about pricing as they recognize that revenue growth is not expected to significantly pick up speed.
Many businesses have managed to boost margins in recent quarters, but average annual revenue growth rates have slowed from the levels observed in 2021 or 2022. This raises questions about the sustainability of those margin expansions, said Kevin Desai, private equity lead and deputy deals leader at PwC US.
The timer is ticking
Despite a lukewarm start to the year, the exit market may soon heat up, with some dealmakers expecting M&A transactions to increase in the second half of this year and gain even stronger momentum in 2025.
“The activity has been slow and it ultimately just needs to rebound, and funds need to return capital,” said Alfred Browne, a partner and co-chair of the PE practice at Cooley.
The scenario everyone wants to avoid is a crowded market — a sudden surge of sponsors unloading assets at the same time.
“When the deal market returns this time again, it will be a hockey stick increase,” said Glenn Mincey, the Global and U.S. head of private equity at KPMG.
For those who are weighing an exit in the near term, it’s important to plan well and choose timing wisely.
“Sellers will need to carefully time when they come to market so that they maximize deal value and get the attention from the buyers they desire,” said Mahvesh Qureshi, a partner at law firm Hogan Lovells.
Given that need for caution, the recovery could be stuck on simmer for a while longer.
Featured image by Joey Schaffer/PitchBook News
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