EY Global Private Equity Lead Analyst
5 minute read 26 Apr 2024
Related topics
Private equity
IPO
Sentiment continues to rise amid an uneven quarter for deals.
In brief
- Sentiment among PE dealmakers rose in Q1 due to more macro clarity, increased visibility into interest rates and a perceived valuation gap.
- Though tech still dominates sectors, its investment percentage of total deployment dipped slightly in the last 12 months.
- Rising activity in coming quarters will be boosted by greater availability of financing.
Sentiment continued to rise amongst PE dealmakers in Q1, driven by greater macro clarity, increased visibility into interest rates, and a sense that the valuation gap – one of the primary impediments to dealmaking in recent quarters – continues to resolve. Nonetheless, announcements remain markedly uneven;It’s becoming increasingly clear that while the PE market will continue to recover over the balance of the year, its path will be nonlinear.
Interest in take privates and carve-outs remains high
PE firms announced US$92b in deals during the first quarter; in a reversal of last quarter’s trend, strength in the US – where value jumped more than 70% – was offset by declines in Asia-Pacific and Europe.
Interactive bar chart showing that PE activity dipped in the first quarter as activity remains uneven from month to month. Source is from EY analysis of Dealogic data.
NextWave Private Equity Podcast
New episode: key takeaways from 1Q 2024
Listen now
How EY can Help
-
Private equity value creation services
Value creation is at the core of every transaction investment thesis. Our business is organized, resourced and led to help private equity firms transform companies and increase their ability to create more value across their portfolio.
Read more
Large deals continued mostly unabated – the number of transactions of US$3b or more climbed by a third, driven by continued activity in take-privates and carve-outs. The first quarter saw 21 take-private deals, underscoring the degree to which PE firms continue to perceive opportunities and mispricings, despite tremendous recent gains in public equities indices. Technology, industrials, energy, defense, consumer, and financials are all spaces where PE firms have led de-listings in recent months.
Carve-out activity remains similarly robust, as strategics continue to rationalize their businesses and raise cash to invest in core competencies. Last quarter, carve-outs made up 20% of deployment activity by value, versus approximately 5% in Q1 2023, and 11% in Q4 2023.
From a sector perspective, tech remains a dominant theme, although investment as a percentage of aggregate deployment has dipped slightly over the last 12 months versus the prior 12. Consumer, by contrast, over the same period grew from 10% of aggregate deployment by value to 14%, driven by interest in verticals such as health food, luxury retail, and pet care. Financials also received a larger share of invested capital, growing from just 6% of deployment by value a year ago to 16% over the last 12 months. While activity in the insurance sector has been a major driver, brokers, wealth managers, and even regional banks have all seen elevated interest from sponsors.
Interactive chart showing that although tech remains the most active sector for PE by far, activity in financials and consumer grew at the expense of industrials and real estate. Source is from Dealogic.
GPs continue to expect an increase in deployment
Expectations continue to rise for an uptick in activity as the year progresses. According to the latest PE Pulse survey, 76% of GPs expect deployment to increase over the next six months, up from 63% in December.
Interactive bar chart showing that the expectations for deployment have increased versus three months ago – GP expectations for their firm’s deployment activity over the next six months. Source is from PE Pulse Q1 2024 survey.
Sentiment analyses of public PE earnings show similar trends – over the last two years, the ratio of positive statements to negative ones has been mostly rangebound, between 25 and 45; however, Q1 saw a marked uptick in optimism across most of the large firms as they talked through 2023 performance and the 2024 outlook, pushing the median sentiment score to 71.
Interactive line graph showing the quantitative measures of sentiment spiked in Q1 – net sentiment scores from publicly traded PE firms’ quarterly earning calls. Source is from AlphaSense.
Sign up for the quarterly PE Pulse
Stay connected with the latest developments in the PE sector
Contact us
Sponsor-to-sponsor deals see uptick amid continued exit drought
As hold periods continue to increase – in the US, for example, average hold periods hit 5.3 years last year – pressure continues to build for realizations. While many corporates remain more focused on selling – in particular, carving out noncore divisions – sponsors have been more active in acquiring PE assets. Q1 saw the value of secondary exits rise 27% versus Q4. In aggregate, secondaries accounted for 26% of exit activity by value in Q1, marking the highest level of the last year.
Interactive bar chart showing that the secondary sales accounted for 26% of PE exits by value in the first quarter, the highest percentage in the last year. Source from EY analysis of Dealogic data.
As secondaries come to the forefront, and as the IPO window appears to crack open again with the launch of Reddit and Astera Labs, market participants expect an increase in exit activity in the coming months. In December, roughly one-third of survey respondents expected exit activity to increase; presently, 50% of GPs expect exits to move higher in the coming months, while another 23% expect them to stay in line with current levels.
Interactive bar chart showing expectations for deployment have increased versus three months ago - how do you think your firm’s deployment activity will change over the next six months? Source is from PE Pulse Q1 2024 survey.
In the meantime, both LPs and GPs are pulling available levers to facilitate liquidity – trading interests on the secondary market, participating in continuation funds, and in some cases, using NAV loans to help facilitate distributions.
Interactive bar chart showing that given a more challenging environment for exits, are there certain things you or your investors are doing to accelerate liquidity. Source is from PE Pulse Q1 2024 survey.
Outlook – rate trajectories could impact deployment activity
One tailwind for activity in the coming quarters is the increased availability of financing. Over the last 18 months, traditional lending sources have had limited appetite for PE transactions, allowing private credit firms to step into the gap. Last year, private credit funded roughly 85% of PE transactions.
The last several months, however, have seen traditional lenders reassert themselves amid stabilized rates and increased demand from buyers of leveraged loans. The market has seen a number of high-profile deals bid by both banks and private credit firms, a dynamic that is likely to continue over the balance of the year.
Interactive bar char showing that leveraged loan activity has increased markedly in both the US and Europe. Source is from Pitchbook Leveraged Commentary and Data.
Survey respondents point to expectations for continued stability in the credit markets – when asked six months ago, one-third expected credit conditions would improve, one-third expected them to stay the same, and another third expected conditions to deteriorate. Currently, however, GPs are increasingly optimistic – close to 90% expect credit conditions to either stay where they are or improve.
However, GPs also expect that rates will stay higher for longer. In our survey, more than 60% of GPs think central banks will cut more slowly than what the market is anticipating.
Interactive bar chart showing that Most PE shops expect rates to remain elevated for longer than the broader market currently expects. Source is from PE Pulse Q1 2024 survey.
In aggregate, as macro uncertainty continues to abate and a soft landing increasingly becomes the base case forecast, the conditions for a more active market are primed. However, firms will continue to remain conservative in their underwriting of potential transactions in order to ensure that value creation plans are able to support the modeling across a broad range of rate scenarios.
PE Pulse from other regions
Read the US PE Pulse
Read more (via EY US)
Summary
As macro uncertainty eases, market conditions prime for more activity. But firms will continue to remain conservative in their underwriting of potential transactions to ensure that value creation plans support rate variations.
Related content
PE Pulse: key takeaways from 4Q 2023
Our host Pete Witte, EY Global Private Equity Lead Analyst, reviews PE deal activity and other highlights during the last quarter of 2023. Learn more.
11 Jan 2024 8m 25s
How GenAI is reshaping private equity investment strategy
A balanced approach to investment strategy is needed to defend against GenAI disruption while also driving portfolio performance. Learn more.
16 Jan 2024 Bridget Walsh
Three questions to help rethink your exit strategy now
As deal flow starts to pick up, private equity firms have an opportunity to create maximum value, but action is needed.
14 Dec 2023 Konstanze Nardi
About this article
Pete Witte
EY Global Private Equity Lead Analyst
Helping clients and stakeholders understand the trajectory and impact of vital trends. Developing thought leadership and insightful content. Aspiring platform tennis pro.
Related topics
Private equity
IPO