Of course, as we all know - with interest rates predicted to fall this year, we're expecting to see PE activity pick up quite a bit.
I wanted to ask you guys though - what do you think will be the major trends that shape PE in 2024? and which firms do you think will end up doing best this year?
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Ah, the ebb and flow of PE activity with the tides of interest rates – classic! Based on the most helpful WSO content, here's what the crystal ball might show for PE trends in 2024:
Dry Powder Utilization: With a record amount of money waiting to be deployed, firms might become more aggressive in seeking out potential targets. This could lead to increased competition but also potentially higher valuations for existing portfolio companies.
Operational Efficiency vs. Multiple Expansion: There's a trend where creating value through operational improvements is getting tougher. Firms might lean more on multiple expansion for returns, as suggested by a Bain report.
Sector-Specific Growth: Certain sectors like real estate/infrastructure funds and private credit are poised for growth. Firms specializing in these areas might outperform.
Technology and Automation: Tech will continue to be a major factor, with automation playing a larger role in operational efficiencies.
Regulatory and Public Perception: The optics of PE execs' compensation and the use of public pension funds could become a talking point, influencing firm strategies.
As for which firms will come out on top, that's a bit like asking which banana in the bunch will ripen the fastest – it depends on a variety of factors. However, firms that can adeptly navigate the above trends, especially those with a strong track record in operational excellence and sector-specific expertise, might just swing to the top of the vines.
Now, tell me more about what you're seeing out there – any trends you've spotted that I haven't covered?
Sources: PE Outlook over the next decade, PE long-term attractivity: Is the trodden path "broken"? Quo vadis gen Y?, Unwrapping Global Trends | The Daily Peel | 6/12/2023, CRE Trends That Are Emerging Now and Will Prevail Throughout Our Careers
Rates will fall but will likely remain elevated around 4.5% for an extended period of time. Also consumer spending is going to slow as people are almost out of savings and student loan repayment is taking up an additional 10% of net-income for millions of family's. B/c of high rates, still higher than targeted inflation, and less spending to backstop the economy, would expect corporate defaults to continue to rise, and as such increased activity among firms focused on stressed/destressed, deep value, and operational improvements. Also business with highly recurring revenue streams that don't suffer in times of decreased spending will likely outperform such as healthcare and business services.
End of 2023 already has begun to see reconciling of the bid-ask spread as buyers (pe companies) and sellers (strategics) have begun to recognize that the current higher-rate environment is here to stay. In terms of who will be successful, firms with a larger existing LP base will do well as LPs are becoming increasingly stringent with who they give money to and over the last year or so, many are only re-upping in funds that they have been invested in prior.
In terms of the higher interest rate environment, PE Firms who are operationally-focused and/or have a large Operations Team full of seasoned C-level executives will do well. PE firms are having trouble generating returns through financial engineering and, instead, are focused on driving organic and inorganic growth through operational improvements, cost cutting measures, and add-on acquisitions.
I think it’s going to be a tough year for tech especially - lots of tech funds are either raising now or going to be raising soon (especially MM), and I think it’s not going to go too well.
Typically firms try to get some liquidity during a fundraise it’s easier for LPs to re-up (“we just sent you a big check from selling x, just recycle that!”). However, in tech especially, it’s been a hard year to get liquidity so far given multiple compression and I don’t think that’s going to change. So firms will either need to sell for mediocre returns, or try to convince LPs to give them more money when they haven’t gotten anything back from the previous funds.
The past ~10 years, especially in software, we’ve seen so much multiple expansion that it’s been super common to see firms selling their winners after ~3 years for a huge return. And that just isn’t happening anymore
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