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Private equity funds collected just half the value of the investments they typically sell in 2024, the third year in a row that investor payouts have failed due to a deal drought.
Buyout houses typically sell 20 percent of their investments in any given year, but industry executives predict cash payouts for the year would be about half that figure.
Cambridge Associates, a leading adviser to large institutions on their private equity investments, estimated that the funds had fallen about $400 billion in payouts to their investors over the past three years compared to historical averages.
The data underscores growing pressure on firms to find ways to return cash to investors, including exiting more investments in the coming year.
Firms have struggled to strike deals at attractive prices since early 2022, when rising interest rates sent funding costs soaring and corporate valuations down.
Dealmakers and their advisors expect merger and acquisition activity to accelerate in 2025, potentially helping the industry operate through what consultancy Bain & Co. has called it a “huge backlog” of $3 trillion in legacy deals that must be sold in the coming years.
Several major IPOs this year, including grocery shipping giant Lineage Logistics, aviation equipment specialist Standard Aero and dermatology group Galderma, have given private equity executives the confidence to take companies public, while the election of Donald Trump has added to Wall Street's exuberance.
But Andrea Auerbach, global head of private equity at Cambridge Associates, warned that the industry's issues could take years to resolve.
“There is an expectation that the wheels of the exit market will start turning. But it's not over in a year, it's going to take a few years,” Auerbach said.
Private equity firms have used new tactics to return cash to investors while properties have been hard to sell.
They have increasingly used so-called rolling funds — where one fund sells a stake in one or more portfolio companies to another fund to another fund that the firm manages — to engineer out.
Jefferies predicts there will be $58 billion in ongoing fund deals in 2024, representing a record 14 percent of all private equity outflows. Such funds accounted for just 5 percent of all exits in the boom year of 2021, Jefferies found.
But some private equity investors are skeptical that the industry will be able to sell assets at prices close to the funds' current valuations.
“You have a huge amount of capital that is invested on assumptions that are no longer valid,” one major industry investor told the Financial Times.
They warned that a record purchase of $1 trillion was reached in 2021, just before interest rates were to rise and many deals were being done on the books of firms with overly optimistic valuations.
Goldman Sachs recently noted in a report that sales of private equity assets, which had historically been made at a premium of at least 10 percent to the funds' internal valuations, have in recent years been made at discounts of 10- 15 percent.
“(Private) equity in general is still over-marked, which leads to this situation where assets are still locked in,” Goldman Sachs Asset Management's Michael Brandmeyer said in the report.
