3) Value creation
Strategic and operational improvements will continue to be the largest sources of PE returns. With opportunities for exits currently slower than historical averages, firms will zero in on efforts to create value in portfolio companies on the operations side. The focus will be on finding the sweet spot between cost-cutting and fueling future growth to prepare for anticipated improvements in the exit market.
Private equity’s four- to six-year holding period is the transformation window to pursue value, creatingopportunitiesacross sales, marketing, operations and finance. Using rapid diagnostics and narrowing down to opportunities that will drive EBITDA will provide clarity around top-line, bottom-line and capital efficiencies. This means that firms will need to understand the true cost drivers of the business and take appropriate action. Third-party spend, pricing and promotions, and tax savings will be prime areas of focus in 2024.
4) Working capital
EY research suggests that most portfolio companies continue to have enormous opportunities to improve in many areas of working capital, especially as optimizing operational value during extended hold periods takes on increasing importance. In the recent PE pulse survey, 80% of the PE professionals surveyed indicated that they were paying more attention than usual to helping companies improve their visibility into cash and liquidity needs.
To manage working capital more effectively, many PE-owned businesses have followed typical cash improvement methods, such as extending supplier terms, running down old stock or factoring some of the debtor book. Right sizing an IT organization and “lease vs. buy” technology options are two additional examples.
While these tactics can help, more firms are also considering adopting holistic tools that enable firms to optimize working capital and cut costs without reducing their capacity to drive top-line growth. Tools and processes that help organizations sharpen cash forecasting – knowing what’s needed where and when and include cash pooling and repatriation measures – can help optimize the use of existing cash within the business. This also provides increased optionality for management teams and sponsors.
5) Retail market expansion
Private equity firms will continue to experiment and develop expanded opportunities via the retail channel. Retail investors have the same attraction to PE as professional investors: asset class resilience, asset allocation diversification and exceptional performance vs. public markets.
To that end, more than 150 private equity firms have already invested in registered investment advisor (RIA) portfolio companies; nearly 30% of them offer crossover opportunities with at least five other wealth service portfolio companies. For many firms, retail inflows represent their fastest-growing source of new funds, leading them to develop new targeting methods for these investors. Moreover, an ever-increasing number of third-party platforms are providing new distribution channels.
In addition, with their existing M&A and investment models, most private equity firms are well positioned to offer wealth management services to retail investors. Some may even consider offering white-glove service as part of a holistic wealth management strategy, creating a true first-mover advantage.
Private equity has grown rapidly over the past 10 years and the current slowdown in deal activity, albeit brief, offers firms an excellent opportunity to leverage new technology – highlighted by AI and GenAI – and to deploy other operational efficiencies that will drive value creation and transformation in their portfolio companies. The firms that take this step will be poised to fully take advantage of new opportunities when deal activity and the IPO market rebounds.
FAQs
Private equity firms will focus on five key trends in 2024. Deploying artificial intelligence will lead the way, followed by investment in infrastructure particularly related to energy projects. Value creation will also be a priority as firms seek to improve strategic and operational efficiency.
What are the trends in private equity in 2024? ›
Private equity firms will focus on five key trends in 2024. Deploying artificial intelligence will lead the way, followed by investment in infrastructure particularly related to energy projects. Value creation will also be a priority as firms seek to improve strategic and operational efficiency.
What are the 4 main areas within private equity? ›
Equity can be further subdivided into four components: shareholder loans, preferred shares, CCPPO shares, and ordinary shares. Typically, the equity proportion accounts for 30% to 40% of funding in a buyout. Private equity firms tend to invest in the equity stake with an exit plan of 4 to 7 years.
Is private equity a growing industry? ›
The private equity (PE) industry is continuing to grow at a rapid pace.
What are the largest private equity firms? ›
The Top 50 Private Equity Firms
| Ranking | Fund Manager | Capital Raised |
|---|
| 1 | Blackstone | $125.6B |
| 2 | KKR | $103.7B |
| 3 | EQT | $101.7B |
| 4 | Thoma Bravo | $74.1B |
46 more rowsMay 16, 2024
In view of the expected normalization of interest rates and the ongoing recovery of most major European economies, the prospects are largely positive. The postponement of many portfolio company exits by PE in 2023 is also likely to boost M&A transactions in 2024 as investors expect more favorable market conditions.
How much dry powder in private equity 2024? ›
According to data collected by Preqin, April 2024 marks the first time since December 2014 that dry powder declined across the private equity industry. Granted, you may need to squint to notice the difference because the current mark is $3.911 trillion, which is only $400 million less than the level at the end of 2023.
What are two main drivers of financial success for private equity investors? ›
Use of leverage and cash flow.
Private equity typically uses cash and debt to acquire businesses. This use of leverage sets up a much higher internal rate of return (IRR) since this is based only on their invested cash.
Where do PE firms get money? ›
A source of investment capital, private equity comes from firms that buy stakes in private companies or take control of public companies with plans to take them private and delist them from stock exchanges. Private equity can also come from high-net-worth individuals eager to see outsized returns.
What are the three ways to make money in private equity? ›
Private equity firms make money through carried interest, management fees, and dividend recaps. Carried interest: This is the profit paid to a fund's general partners (GP).
Another industry sector that is likely to attract PE investment in 2024 is technology. Technology is a dynamic, fast-growing and highly competitive sector that encompasses various subsectors, such as software, hardware, internet, cloud computing, artificial intelligence, cybersecurity, fintech, e-commerce and gaming.
What is happening to private equity? ›
At a Glance. Private equity continued to reel in 2023 as rapidly rising interest rates led to sharp declines in dealmaking, exits, and fund-raising. The exit conundrum has emerged as the most pressing problem, as LPs starved for distributions pull back new allocations from all but the largest, most reliable funds.
Why is private equity booming? ›
Institutional investors and wealthy individuals have increasingly turned to private equity firms for greater returns and control. These firms acquire, restructure, and often improve the performance of companies, driving economic growth and innovation.
What are the top five private equity firms? ›
Some top private equity firms include Blackstone, TPG, Bain Capital, KKR, Thoma Bravo, and Vista Equity Partners.
What is the most successful private equity firm? ›
Private equity firms are typically ranked by their assets under management (AUM) and success in returning gains to investors. The Blackstone Group Inc. had the most AUM of the firms in this list as of the end of the first quarter 2022.
What are the big three private equity firms? ›
- BlackRock - AUM: $8.2 trillion. ...
- Blackstone - AUM: $1.1 trillion. ...
- Apollo Global Management - AUM: $600 billion. ...
- KKR - AUM: $550 billion. ...
- The Carlyle Group - AUM: $420 billion. ...
- CVC Capital Partners - AUM: $180 billion. ...
- TPG - AUM: $160 billion. ...
- Thoma Bravo - AUM: $130 billion.
While there could be a growth slowdown in the first half of 2024, experts believe growth should resume in the second half of the year. Americans faced many financial challenges this year, from persistent inflation to increasingly expensive debt.
What's happening in the private equity market? ›
According to Bain, “the numbers are all very GFC-like: Deal value and deal count have fallen 60 percent and 35 percent, respectively, from their peaks in 2021. Exit value is down 66 percent, and the number of funds closing is off by nearly 55 percent.”
What the future holds for private capital? ›
Private capital enters a new era of value creation opportunity and dealmaking. The outlook for private capital in 2024 is positive, as a more stable investing environment is bringing renewed optimism that M&A activity will steadily pick up in the course of 2024.
