2023 was a year of both feast and famine for European private equity firms.
While several large funds were able to notch supersized fundraising totals—for instance, CVC Capital Partners’ record-breaking €26 billion fund close (about $28.4 billion)—a long tail of smaller funds were left struggling to cut through.
Cash-strapped LPs, squeezed by the denominator effect and a slump in distributions from funds, in general opted to direct their limited capital toward big-name funds.
Will 2024 be a year when exits pick up, freeing LPs to reinvest, or will it be another year of PE firms pursuing alternative means of creating liquidity?
Here, industry experts have their say.
Pockets of optimism for fundraising
Perhaps unsurprisingly, few market watchers are willing to predict any major shifts in the fundraising ecosystem. Elias Korosis, partner and head of growth investing and strategy for Federated Hermes GPE, describes prospects for fundraising as the “zillion-dollar question.”
However, he feels there are pockets of the market that are better positioned.
“The unlevered or low-levered parts of private equity are likely to have an easier story while rates stay high and financing conditions tight.” he said, including areas like the lower middle market and growth equity.
Although for larger-cap deals, he suggests that targeting private wealth as a source of funds will be a big focus next year.
Euan Finlay, head of EMEA at outsourced investment office Partners Capital, singles out “dedicated energy transition private equity funds, particularly industrial decarbonization buyout funds and infrastructure players with PE-like approaches” as likely beneficiaries of greater fundraising next year.
Whatever a fund’s strategy, Korosis and Finlay both stressed the renewed importance of showing its value-creation abilities.
“The past three to four years—with a global pandemic, war, a stock market rollercoaster and the sharpest rise in bond yields globally in 40 years—have thrown an obstacle course challenge to the funds,” said Korosis.
He added that “those that can show consistency of performance across this ‘tough mudder’ race” will be best positioned for successful fundraising efforts.
Cautious steps towards increased exits
A key factor holding back PE fundraising in 2023 was constrained exit activity. IPO markets were shuttered for much of the year, and big-ticket M&A activity was muted. While there is a hope that both markets will warm up in 2024, there is little sign of immediate improvement.
European PE exit deal data for 2023 may at face value look reasonably healthy as of Q3, according to PitchBook’s latest European PE Breakdown. Total deal value stood at €238 billion, on a par with full-year totals for several other years during the last decade. But exits exceeding €1 billion skew the figures—notably Arm’s huge IPO, which had a pre-money valuation of around $47.5 billion. Median exit values increased 31.1% from 2022’s full-year figures.
There were eight large deals in Q3 alone, helping to set 2023 second to 2021 in the total number of mega-exits, according to the report. Remove them from the equation, and it is a less rosy picture.
“We’re seeing a backlog of exits. Multiple assets are being prepared for sale by sponsors under pressure to return cash to their investors, but the market conditions are making sellers nervous about launching a process,” said Peter Banks, a PE partner at law firm Allen & Overy.
However, if the economic environment continues to stabilize, he expects a cautious uplift in processes.
“With a loosening of credit terms, and greater visibility over interest rates, we expect that a significant number of these exits will transact in 2024,” he said.
Tessa Agar, a partner at law firm Goodwin and a member of its PE practice, is also seeing an increase in exit preparations.
“There remains a sense of caution given the continual impact of high interest rates, valuation gaps and the availability and cost of leverage,” she said. “All of which dampened deal activity throughout 2023.”
However, Agar feels the situation will be different entering into 2024.
“These are no longer new challenges, and PE funds have spent much of 2023 adapting and strategizing. We should start to see the fruits of that labor through a broad range of exit processes, from smaller exits achieved through PE’s continued focus on buy and builds to alternative exit/funding strategies by way of take privates, GP-led secondaries, use of continuation funds and NAV and hybrid facilities.”
A secondaries surge?
Globally, secondaries fundraising had a strong year in 2023. As of the end of September, $68.1 billion had been raised, according to PitchBook’s Q3 2023 Global Private Market Fundraising Report, higher than all annual totals on record for the fund type, excepting 2020. And with little sign of a quick recovery in the M&A and IPO markets, 2024 looks set to be a brisk year for secondaries transactions.
“We expect a promising future for private investment secondaries, marked by growth to a new record transaction volume in 2024,” said Nicolas Schellenberg, managing director at investment consultant Cambridge Associates.
“This optimism is driven by several factors, including the substantial amount of dry powder, an expected narrowing of the bid-ask spread in secondaries, the continuing need for liquidity among LPs and ongoing market innovation.”
GP-led transactions, such as continuation vehicles, attracted significant attention in 2023. Although these structures are not new, their use as a tool to generate liquidity for both LPs and GPs has been in the spotlight.
Given the challenging exit environment, Sanjeev Phakey, head of secondaries at Federated Hermes GPE said he expects GP-led secondaries to continue being a significant phenomenon.
However, he also notes that scrutiny around the quality of the assets in these transactions could increase as secondary buyers become more selective.
“In the year ahead, successful GP-led processes will be those for the highest-quality assets, where the GP is able to demonstrate strong alignment with the continuation vehicle,” he said.
Growth in GP stakes?
Last year, there were several notable GP-stakes transactions, especially Permira‘s 40% stake in Spanish investment manager AltamarCAM Partners. These deals came into focus as an alternative means for GPs to generate growth and exposure to additional returns in a constrained deal environment. And, for the GP selling the stake, as a different way to secure capital.
Bryan Jenkins, co-head of the portfolio management group at Hamilton Lane, said in a recent webinar hosted by law firm Dechert that two types of GPs that are typically well-placed to benefit from a GP-stake divestiture. The first is successful upper-middle-market managers at an inflection point in their development; the second is fledgling managers looking at a first or second fundraise and in need of capital.
He says that over the last five to seven years these types of transactions have largely been win-win; although positive tailwinds have aided.
In looking forward, “I think the outlook is maybe a little more neutral over the next few years than it was over the preceding five years,” said Jenkins. “But these transactions certainly aren’t going away.”
Speaking in the same webinar, Tikehau Capital head of private debt Cécile Lévi, suggested that it is crucial to ensure a correct alignment of interests between all relevant parties for a GP stakes transaction to be successful. Following a deal, it will no longer be enough to only consider GP-LP alignment.
“You need the GP-staker, the GP and the LPs to be aligned in the economics and the governance,” she said.
Featured image by Yinjia Pan/Getty Images
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