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Valuations

PE deals plummeted in 2023. Here’s why it won’t happen again in 2024.

Sluggish dealmaking in 2023 puts pressure on private equity firms to get deals done in 2024.

After a two-year decline in transaction volumes, private equity managers are anxious to get deals done in 2024.

PE dealmaking plummeted in 2023 as higher interest rates upped the cost of leverage and clouded exit avenues made it challenging for managers to meet LP distributions. To fuel a reboot in deal and exit activity and ultimately return capital to LPs, buyers and sellers of PE assets will have to come to an agreement on pricing in 2024.

Total US PE deal value declined by 29.5% in 2023, hitting its lowest point since 2017—apart from the lockdown-induced lows of 2020—according to PitchBook’s 2023 Annual US PE Breakdown.

 

Of the deals that did get done in 2023, valuations were notably lower than in years prior. US PE multiples are down around 18% from their peak in 2021, according to PitchBook’s revenue and EBITDA data sets.

With buyouts hovering at lower multiples, GPs were reluctant to sell assets, with many opting to slow transactions until the environment became more favorable.

This extended the average time that PE managers held onto their assets: In 2023, the median holding period for US PE investments hit 6.4 years, marking the first time since 2015 that the figure hit above the six-year mark.

Pricing gaps between buyers and sellers on both the primary and secondary PE markets and lackluster post-IPO valuations added fuel to fire, inhibiting exits and therefore distributions to LPs.

In 2023, global PE exit value hit its lowest point in a decade, accumulating a total of $574.2 billion.

In the new year, money managers are beginning to feel “a sense of urgency” to exit positions and generate liquidity for their LPs, said Ramona Nee, co-head of the US private equity practice at Weil, Gotshal & Manges, a New York-based law firm.

“The longer you hold on to good assets, the more difficult it can be sometimes to sell them,” Nee said.

Nee said GPs urgently looking to generate concrete returns for their LPs will need to align on pricing for their assets. With valuations down, she said sellers will need to lower their prices to meet buyers’ expectations.

“I think that seller expectations are going to start to meet buyers a little more,” she added. Sellers are beginning to understand that “they may not be getting the multiples they were generating in 2021 for a similarly sized asset or an asset that’s in the same industry.”

What’s more, PE sellers are faced with an impending maturity wall of deals made five-to-seven years ago. Now, PE firms looking to exit these investments made during an economic upswing are turning to alternative paths of liquidity, like continuation funds.

Further complicating the picture, the dearth of distributions led to fundraising challenges in 2023: LPs were either hesitant to re-up with existing managers or were capital constrained as a result of fewer distributions.

Without fundraising dollars, the cycle continues and has spilled over into 2024. On Tuesday, alternative investment firm Summit Partners reportedly halted new investments from its credit arm after struggling in its latest fundraising round.


Featured image by Diane Miller/Getty Images

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