Within global private equity, deal value plunged by 37% to $438 billion in 2023 from $699 billion in the prior year, while exit value dropped by 44% to $345 billion from $613 billion over that time period.
In addition, 38% fewer buyout funds closed — declining to 449 in 2023 from 722 in 2022, according to Bain & Co.'s "Global Private Equity Report 2024" issued March 11.
Indeed, since reaching their peaks in 2021, deal value and deal count have fallen 60% and 35%, respectively, while exit value has plummeted 66%, and the number of fund closings has dropped almost 55% since 2021.
These declines in activity have had a "chilling effect" on fundraising, the report said, citing that slower distributions have left limited partners "cash flow negative, crimping their ability to plow more capital back into private equity."
The private equity industry raised $1.2 trillion in fresh capital in 2023 (down 20% from the $1.5 trillion in 2022), while the buyout category attracted $448 billion, the report stated.
Moreover, LPs were "highly selective," Bain noted, citing that "while capital flowed to the largest 'reliable hand' buyout funds, fundraising for most was as hard as it's ever been."
"The word for this market is stalled," said Hugh MacArthur, chairman of Bain's global private equity practice, in the report. "The culprit was the sharp and rapid increase in central bank rates, which caused general partners to hit the pause button."
For now, exit channels have largely evaporated, leaving GPs with a massive $3.2 trillion in unsold assets and restricting the flow of capital back to LPs.
However, MacArthur is optimistic about 2024. "Interest rates appear to have stabilized" he noted in the report. "Record dry powder is stacked and ready for deployment. Nearly half of all global buyout companies have been held for at least four years."
In short, MacArthur added, the "conditions appear to be shifting in favor of hitting the 'go' button," while the report observed that "green shoots of a recovery are starting to poke through," with the likelihood of moderating interest rates as the most important driver of a potential recovery.
Even slight cuts in interest rates are likely to stimulate deal-making "as long as the macro outlook remains relatively stable," Bain said in the report. Moreover, buyout funds alone are currently sitting on a record $1.2 trillion in dry powder, with 26% of that figure 4 years old or older, up from 22% in 2022.
"That creates a heavier incentive than normal for GPs to get off the sidelines and start buying, even if conditions aren't ideal," the report noted. "Activity is already ticking upward, and with help from the Fed (Federal Reserve) and the European Central Bank, the bias in 2024 is likely to the upside when it comes to deal count and value."
Exits also pose some problems, the report said. "Barring a sharper-than-anticipated drop in rates, sellers will continue to face high hurdles to unloading companies to strategic buyers, other sponsors, or the public markets," Bain said. "With sponsors struggling to send cash back to their LPs, 2024 will likely be defined by how creative the industry can be in finding ways to generate liquidity."
The portfolio companies that will excel in this "difficult market" are those that have used every means possible to boost earnings before interest, taxes, depreciation and amortization "efficiently and can demonstrate to the next owner that there's money left on the table," Bain said. This will require funds to "get sharper at finding and pulling the value-creation levers that generate organic growth — pricing, sales-force effectiveness, and product innovation," among others.
