Global M&A Trends for Private Capital

{{clone:#accordion-content .html [data-custom-code="Chart"]}}

PE buyout activity decreased from a record high of almost 11,000 deals in 2021 to just over 8,000 in 2023, a 27% decline over two years, due to macroeconomic factors and financing constraints. In 2024 there is greater optimism that PE buyout activity will pick up for the following reasons:

• Greater stability returning to debt markets will create a more favourable borrowing environment for dealmaking.

• Sellers are increasingly motivated to sell because the IPO market remains largely inaccessible as an exit route, and lower buyout activity in the past two years has increased the number of companies looking for a buyer.

• Corporate portfolio reviews will lead to carve-outs and divestitures of non-core assets and create buying opportunities for PE.

• The valuation gap which had been a factor in many stalled deals in 2023 appears to be narrowing. 

• Opportunities remain for public-to-private deals. We expect to see further take-privates, which took off in 2022 as global stock markets corrected, although the recent upward trend in stock values may mean fewer attractive opportunities are available.

• PEs have a greater appetite for taking a platform approach and undertaking a series of acquisitions.

• PE funds have increasingly shifted their strategies from trying to perfectly time the market to a through-cycle M&A approach—investing and exiting throughout highs and lows of a business cycle—to mitigate risk.

PE exits fell by 43% between 2021 and 2023, an even greater drop than the decline in buyout activity. This has created a buildup of portfolio companies which will need to exit in the not-so-distant future. 

Private equity firms tend to hold investments on average for four to five years. Many of the buyouts made during the pandemic surge are now approaching that exit time frame, and we expect many PEs will start to prepare to bring them to market in 2024. However, with the concern that the high multiples paid to acquire some of these assets in the peak M&A years will result in poor returns for investors, others may remain reluctant to sell.

PE funds will continue to look at their portfolios to determine the best course of action—whether to exit an investment at an acceptable return or hold onto an asset for longer when there is a clear plan which can be implemented to drive greater value and create a better future return. 

Volatility in public and private markets remains a concern for both GPs and LPs in making investment and exit decisions, and the slowdown in dealmaking has brought liquidity to the forefront, prompting creative structuring and financing solutions to supplement traditional exit routes such as the following:

• Continuation vehicles: The use of continuation vehicles—a structure in which GPs transfer assets from a fund that is at the end of its term into a new fund—allows GPs to retain and reinvest in quality assets with growth potential, while providing LPs with the flexibility to cash out or take an equivalent (or lower) ownership interest in the newly created fund.

• Minority sales: The sale of a minority stake to another party allows a fund to make a partial distribution while retaining some of the future potential upside. These minority sales have also been popular because they can potentially be structured to avoid triggering a change-in-control clause and to keep existing debt finance in place.

• Structured capital raise: A structured capital raise, which can take the form of financing a specific asset using a financial instrument or financing the entire business using a nonstandard instrument (structured equity, convertible bond, etc.) can be a lower-cost, custom-fit solution to the company’s capital needs. It may also offer appealing risk/return dynamics in a buyer-friendly market.

• Net asset value (NAV) financing and preferred equity: These offer GPs a way to bring cash into portfolio companies and also provide limited-partner investors a means of realising some cash from their investments, but without triggering a ‘fire sale’ or forgoing all ordinary equity future upside. GPs are increasingly turning to net asset value (NAV) financing and preferred equity as a way to meet a variety of needs and objectives, the most common being to inject liquidity into existing portfolio companies, make add-on acquisitions or enable distributions back to LPs.

The combination of geopolitical turmoil, sinking valuations, inflation and rising interest rates which set back private markets of all kinds during 2023 probably had the most severe impact on the venture capital sector because of the sector’s higher risk-reward ratio. Not only did venture capital (VC) investment decline in 2023 compared to 2022; there was also a 60% decline in fundraising. But there are glimmers of hope for areas such as climate tech investment. While overall VC investment was down in 2023, climate tech’s share of private market equity and grant investment has increased, tracking at an annual rate of 10% in 2023, extending a decade-long upward trajectory from less than 2% in 2014.

With interest rates expected to remain high in the near to medium term and VCs likely to remain cautious, start-ups in need of liquidity in 2024 may struggle. We expect some may be able to secure new funding or bridge funding, but others with a longer pathway to liquidity may find a sale is the best option.

While the real estate industry remains in a state of transition to a higher cost of capital environment, with recent progress made on inflation and the likely reduction in interest rates globally, the business climate in which real estate dealmakers are operating has just become more favourable. We expect this will boost investor confidence and lead to a revival in real estate transaction activity in 2024.

Medium- to long-term megatrends—such as demographic shifts, housing affordability, decarbonisation and digitalisation—are all important factors for real estate investors to consider as they construct, or rebalance, their real estate portfolios. For example, the shift toward an aging global population is helping drive demand for healthcare-related real estate, while digitalisation trends—including growth in artificial intelligence (AI) and an increased need for data usage and storage—are driving greater demand globally for data centres.

Infrastructure provides consistent cash flows often extending over many decades, making it an attractive asset class. Infrastructure, particularly energy infrastructure, remains a bright spot for investment activity in 2024 as investors are placing bets on the importance of the energy transition to society achieving its net zero goals. We expect infrastructure will continue expanding as an asset class, creating investment opportunities, particularly in infrastructure development. This includes areas such as energy storage, the electrification of transportation, alternative fuels for aviation and marine industries, and digital infrastructure such as data centres (as noted above).

Capital continues to flow into infrastructure, aided by government regulation in many countries whether through tax incentives, government-backed pools of capital, policy changes to enhance investment or government intervention in specific projects. The US Inflation Reduction Act (IRA), passed into law in 2022, and other legislation, such as the European Union’s Green Deal Industrial Plan, aim to increase investment in low-carbon infrastructure projects. This increasing capital will continue to drive investors into newer sectors, such as healthcare, where the characteristics of infrastructure may not initially seem to, but do in fact, exist.

The structural changes in public financing markets have allowed private credit to outperform other asset classes in terms of growth—with dry powder growing at a 15% CAGR over the past 10 years and AUM growing at a 14% CAGR over the same period. This growth has solidified private credit’s position as a well-established asset class, suitable for long-term investors.

The evolution of the private credit market is resulting in a broader range of options for companies seeking capital. Borrowers are increasingly turning to flexible capital and customised funding solutions, often adopting an approach that combines both private and public funding sources. Private credit is playing an ever-increasing role in providing financing for deals and—with global dry powder of US$450bn at the end of December 2023—they are in a strong position to support an increased level of dealmaking activity in 2024.

As private capital players seek to expand into new asset classes and bring more AUM under their control, the insurance industry has become a key area of focus for investors. We expect further investment in insurance companies by private capital players who are attracted to the opportunities presented by the long-term capital to manage. This capital can be invested in private credit strategies in which they have strong origination capabilities. Life and annuity insurers and reinsurers offer these characteristics. They can also provide the opportunity to spread income across various lines of business based on the difference between what is earned on investments and the return required to be paid on the underlying policies. Typically, on acquisition, the AUM will be transitioned from lower-yielding assets into private credit strategies that offer higher yields, subject to insurance regulations.