Key H1 Trends
For private equity, the first half of 2024 presented a mixed landscape in private markets compared to 2023 trends. Despite mergers and acquisitions increasing by 12% YOY, there was still a 50% decline from the highs of 2020 and 2021, as many exits were partial (continuation funds and minority recapitalizations). Despite a slight improvement in liquidity conditions and easing macroeconomic headwinds (e.g., lower inflation), new platform deals continue to be slow, with add-ons still representing nearly 80% of overall private equity transactions and initial public offerings continuing to be slow.
The repercussions of these trends are significant, with four key areas of concern for private equity firms.
Healthy Company Exits with Modest IPO Market
H1 Trends:
Exit multiples held at the ongoing 13x range from 2021 as many private equity firms achieved a full exit through sales to corporations or partially realized distributions through continuation and recapitalizations. Despite some economic headwinds, including slowing consumer growth for lower-income customers, dealmaker confidence has begun to return to pre-2020 sentiments heading into the end of the first half of the year. However, private equity-backed initial public offerings were still muted despite a strong first half of the year for public markets, given the delay of interest rate cuts.
H2 Predictions:
We expect companies with strong dynamics (e.g., technology-driven or non-consumer-driven businesses) that invested in value creation efforts over the past two years to achieve successful exits. A rate cut is expected, which will create a more favorable deal-making environment, and the continued high market of dry powder will intensify competition for high-quality assets, justifying strong valuations and increasing deal activity. We expect many companies to follow a dual path process for initial public offerings, given the slow momentum in the private equity-backed market, such as the recent Nordic/Sunrise Medical deal.
Emphasis on Value Creation Playbooks
H1 Trends:
In the first half of 2024, private equity firms focused on margin-improving value-creation activities through technology, enterprise resource planning and supply chain investments. This shift was driven by a challenging economic environment and the current geopolitical climate, emphasized by rising interest rates and heightened inflation, which pressured firms to prioritize capital efficiency and operational improvements. Private equity firms are heavily investing in value creation initiatives, with technology investments seeing particular emphasis due to corporations and other private equity buyers valuing strong tech infrastructure and enterprise resource planning tools during exit due diligence processes.
H2 Predictions:
As private equity firms continue to prepare their portfolio companies for H2 2024 exits, many will double down on technology, product and supply chain investments for recurring margin improvements. This will make portfolio companies more resilient and attractive for 2025 exits and address the liquidity issues from the first half of the year. In addition, private equity firms will invest in target state improvements and go-to-market strategies that optimize their companies for cross-selling and upselling opportunities.
Strategic AI & ML Investments
H1 Trends:
Generative AI has become the next frontier of productivity, as private equity firms are eager to leverage this capability to enhance top- and bottom-line margins. However, as the computational power required to train AI systems continues to increase relative to the payout, private equity investors are becoming cautious. Many investors are asking portfolio companies that leverage expensive learning language models for total cost of ownership analysis and other use cases to focus on AI readiness before implementing AI and ML.
H2 Predictions:
Portfolio companies will look at smaller learning language models to address key, high-level use cases (e.g., product and code quality and sales effectiveness). Process and data quality assessments will be especially critical for portfolio companies interested in adopting AL and ML, as these tools will begin to play an even more important role in exit readiness preparation. Optimizing and curating data to maximize value from tech-enabled solutions will allow private equity firms to accelerate exits, which is essential given the current market uncertainty around interest rates.
Distressed Mergers, Acquisitions and Bankruptcies
H1 Trends:
The bankruptcies of private equity-backed companies continues at a record pace—up 36% YTD—with many portfolio companies working with private credit lenders to extend maturity and/or work on performance improvement plans to return to cash flow growth. MorganFranklin Consulting has experienced a significant uptick in inbound private equity firm requests around work with portfolio companies to build recovery plans prior to potential bankruptcies.
H2 Predictions:
Distressed mergers, acquisitions and bankruptcy activity is expected to continue, despite pushes by private creditors to extend lifelines to struggling companies. We expect private equity firms and their credit teams to focus on infusing additional capital into distressed companies to generate “equity-like” returns on their holdings. This will, in turn, drive value creation activities and rapid consolidation of assets to salvage the value of these distressed investments.
Expectations for H2 2024
While investors will continue to identify creative and sustainable ways to find liquidity and drive value, private equity investors should expect a continued emphasis on value creation and operational/commercial activities (e.g., AI/ML, supply chain and go-to-market activities). In the first half of 2024, 49 exits were announced or completed in North America and Europe by way of a continuation fund process. This compares to 33 for the same period in 2023, a 48.5% increase, and is tracking in line with our expectation of 100 for the full year.
We expect a continued increase in distressed mergers, acquisitions and bankruptcies, with private credit firms taking over assets. While the recent CPI report brings hope of an increase in mergers and acquisitions and new platform deals, we expect a continuation of trends observed in the first half of the year with a full recovery deferred to 2025.
Frequently Asked Questions
How did AI impact private equity in the first half of the year?
Generative AI is continuing to prove itself as the next frontier of business productivity. But as costs rise, investors are looking to portfolio companies to assess their AI readiness before jumping in and utilizing expensive artificial intelligence and machine learning tools.
How will the distressed M&A trend impact the second half of the year?
As bankruptcies are still trending upward, private creditors are being pushed to extend lifelines to struggling companies. Expect to see a mix of value creation activities and consolidation to drive returns for private equity firms and private creditors.
What did the exit market look like in the first half of 2024?
In the first half of the year, the market continued to lag, but partial exits—continuation funds and minority recapitalization—are in line with analyst estimates. A slight easing of economic headwinds appears to be helping the private equity market recover slowly, though it’s unlikely we’ll see a return to the highs of 2020/2021 anytime soon.
