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.
How is the private equity market doing? ›
Private equity aggregate exit value of $234.1 billion in 2023 was down 23.5 percent from $306.0 billion in 2022, and down 72.0 percent from $836.1 billion in 20211.
What is the outlook for the LBO market? ›
Leveraged finance market participants say they are optimistic that new leveraged buyout deal-making will pick up in 2024, amid a year with anticipated interest rate cuts. Still, many do not expect volumes to return to the higher levels of years past, according to dealmakers and investors surveyed by Reorg.
Why are PE firms thriving? ›
By prioritizing operational improvements, PE firms can not only navigate the challenges of high interest rates but also unlock new avenues for growth and value creation in their portfolio companies.
What is the stock market trend in 2024? ›
Wall Street analysts' consensus estimates predict 3.6% earnings growth and 3.5% revenue growth for S&P 500 companies in the first quarter. Analysts project full-year S&P 500 earnings growth of 11.0% in 2024, but analysts are more optimistic about some market sectors than others.
What stock will boom in 2024? ›
*Based on current CFRA 12-month target prices.
- Nvidia Corp. (NVDA) ...
- Alphabet Inc. (GOOG, GOOGL) ...
- Meta Platforms Inc. (META) ...
- JPMorgan Chase & Co. (JPM) ...
- Tesla Inc. (TSLA) ...
- Mastercard Inc. (MA) ...
- Salesforce Inc. (CRM) ...
- Advanced Micro Devices Inc. (AMD)
Slow economic growth, labor issues, high interest rates, inflation, geopolitical tensions, potential recessionary pressures, and instability could all dampen fundraising and exit opportunities. Despite the slowdown in 2023, private equity firms remain optimistic.
What is the target market for private equity firms? ›
Individual investors or partners
The vast majority of marketing done by a private equity firm is looking for individual investors or general partners. These individual investors or partners are individual people, generally speaking. Therefore, they can be spoken to on a personal level.
What is private equity looking for? ›
Private equity firms usually look for entry-level associates with at least two years of experience within the banking industry. Investment bankers usually follow the PE firm career path as their next job and typically have a bachelor's degree in finance, accounting, economics, and other related fields.
Who bears the debt in an LBO? ›
A key feature of an LBO is that the borrowing takes place at the company level, not with the equity sponsor. The company that is being bought out by a private equity sponsor essentially borrows money to pay out the former owner.
One of the primary risks in LBOs is the high level of debt used to finance the acquisition. If the company's performance doesn't meet expectations, the debt burden can become unsustainable, leading to financial distress.
What are the key risks in LBO? ›
Risks of LBOs
- Financial Risks. High debt levels and susceptibility to interest rate fluctuations pose significant financial risks. ...
- Operational Risks. Integration challenges and potential disruptions to business operations present operational risks. ...
- Market and Economic Risks.
The 11 largest private equity firms can be found below:
- BlackRock - AUM: $7.5 trillion. ...
- Blackstone - AUM: $951 billion. ...
- Apollo Global Management - AUM: $523 billion. ...
- KKR - AUM: $471 billion. ...
- The Carlyle Group - AUM: $369 billion. ...
- CVC Capital Partners - AUM: $146 billion. ...
- TPG - AUM: $135 billion. ...
- Thoma Bravo - AUM: $114 billion.
With M&A activity continuing its lower volumes globally and the IPO markets slow, although slightly thawing, sponsors saw diminished exit opportunities in 2023. Global private equity exits shrank in value from approximately $783 billion in 2022 to approximately $574 billion in 2023, down more than 25%.
What is the biggest PE firm? ›
What Are the Biggest U.S. PE Firms?
| Top U.S. Private Equity Firms | AUM |
|---|
| Apollo | $598 billion |
| KKR | $510 billion |
| The Carlyle Group | $381 billion |
| Bain Capital | $165 billion |
6 more rowsMar 21, 2024
Stocks and bonds may both be poised for success in 2024. Easing inflation and a pivoting Fed should reduce headwinds that have faced both asset classes in recent years. Resilient growth may prove to be an additional tailwind for stocks.
Is private equity doing well? ›
Private equity strategies diverged
Buyout notched its highest fundraising year ever in 2023, and its performance improved, with funds posting a (still paltry) 5 percent net internal rate of return through September 30.
What is the trend in PE VC investment? ›
PE/VC investment witnessed a 11% year-on-year decline in 2023 due to drop-in overall deal activity, with the number of deals falling by 33%. Startups segment experienced a substantial 42% decline in the number of deals, leading to an even steeper drop of approximately 53% in dollar value of investments.
How has PE changed over the years? ›
Additionally, the physical elements of P.E have also evolved. With greater research and knowledge, fitness has become focused on a wider variation of activities that use different movements and techniques. P.E today also emphasises the value of exercise in physical and mental well-being.
