A dip in interest rates could make it easier for private market managers to again outperform the public markets in 2024, industry insiders say.
Higher rates mean private equity managers have less room to maneuver because they buy companies at a lower price when rates are high, BCI's Pittman said.
"There's been a lot of pressure on private equity GPs because many of their investors are overweight private equity and private assets, in general," he said.
According to Pensions & Investments' annual survey of the largest U.S. retirement plans, private credit assets among the 200 biggest plans grew 12.5% to $98 billion in the year ended Sept. 30, 2022, despite some asset owners' portfolios falling during the period. Private equity was up 2% to $692 billion in the year ended Sept. 30, 2022.
Another stumbling block for the industry is the continued uncertainty around valuations. Private market participants use public market comparisons as well as transaction prices in recent deals as metrics in valuing their portfolios.
When public markets are more liquid and transactions are more fluid, investors and managers have a better idea of valuations than when mergers and acquisitions are down about 60%, he said.
Jeremy S. Schein, a partner with alternative investments firm Corsair Capital, is also optimistic that transaction volumes will increase in 2024.
"Many companies seem to be 'getting ready to get ready' to sell," he said. "Despite the IPO market's slow recovery, if market levels remain steady and prospects of a soft landing with lower interest rates grow, we could see increased strategic bids, utilizing stock for transactions as early as Q1" of 2024.
But uncertainties, including the 2024 presidential election in the U.S., will prompt buyers to remain cautious and Corsair executives expect more targeted sales, in which buyers reach out to potential sellers, than had been the norm a few years back, he said.
Another reason transactions could be just starting to pick up is that private equity managers have a total of more than $4 trillion in dry powder, said Thomas Smale, chief executive of FE International, a midmarket tech-focused M&A advisory company. So they're getting more creative to deploy that massive amount of money, including smaller deals, Smale said.
For example, private equity managers previously aiming to acquire companies above a $100 million enterprise value may now be looking at deals with a $50 million enterprise value instead, he said.
In 2024, private equity managers will remain "disciplined on the financial profile of the target company," by avoiding companies losing money, Smale said.
"Deals are happening where buyers are willing to get creative and sellers have less inflated expectations on valuations that may have happened in previous years," Smale said.
Even with a bit of a pickup in transactions, there are still fewer deals than in the past, which means that managers have to hold onto assets longer said James Reynolds, global co-head of private credit at Goldman Sachs Asset Management. GSAM has $110 billion in credit assets under management.
"With the lack of IPOs and limited exits in private equity-owned assets, the effective duration of our investments is increasing," Reynolds said. "Expect some pent-up exit activity leading to some active harvesting level in 2024 onwards."
In the last six months, Reynolds said there has been "a notable increase" in private equity-backed transactions, including some increases in deals that take public companies private, he said.
Goldman Sachs' Reynolds is optimistic that transactions will ramp up in the first half of 2024.
In the meantime, GSAM was a very active lender in 2023, he said. The higher interest rates have benefited GSAM's credit business, generating "the most attractive yields I've seen," he said.
To guard against risks of borrowers who cannot pay the elevated financing costs, GSAM lends to companies that generate predictable cash flow, Reynolds said. Those companies will continue to service the debt and to grow, he said.
Molly LeStage, managing principal, private markets consultant at Meketa, said there's been a narrowing of bid-ask spreads, which are the difference in the price a seller wants to sell and a buyer wants to buy.
"Hopefully, we will see prices coming down and transactions going up in 2024," she said.