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Private equity funds paid out in 2024 only half the value of the investments they normally sell. For the third year in a row, investor payouts fell short due to a deal drought.
Buyout houses typically sell 20 percent of their investments in a given year, but industry executives expect cash payouts for the year to be about half that.
Cambridge Associates, a leading adviser to large institutions on their private equity investments, estimated that funds’ payments to their investors have fallen by about $400 billion over the past three years compared to the historical average.
The data underscores increasing pressure on companies to find ways to return cash to investors, including by exiting further investments in the coming year.
Companies have struggled to strike deals at attractive prices since early 2022, when rising interest rates led to a rise in financing costs and a fall in company valuations.
Dealmakers and their advisers expect merger and acquisition activity to accelerate in 2025, potentially helping the industry address what consulting firm Bain & Co. calls a “massive $3 trillion backlog.” of aging deals that will have to be sold in the coming years.
Several big IPOs this year, including food transportation giant Lineage Logistics, aviation equipment specialist Standard Aero and dermatology group Galderma, have given private equity executives the confidence to take companies public as the election of Donald Trump fuels exuberance on the wall Street contributed.
But Andrea Auerbach, global head of private investment at Cambridge Associates, warned that the industry’s problems could take years to resolve.
“There is an expectation that the wheels of the exit market will start turning. But it won’t end in a year, it will take a few years,” Auerbach said.
Private equity firms have used novel tactics to return cash to investors while holdings have proven difficult to sell.
They are increasingly using so-called continuation funds — in which one fund sells a stake in one or more portfolio companies to another fund that the company manages — to plan exits.
Jefferies predicts there will be $58 billion in continuation fund deals in 2024, a record 14 percent of all private equity exits. According to Jefferies, such funds accounted for only 5 percent of all exits in the boom year of 2021.
But some private equity investors are skeptical that the industry can sell assets at prices close to funds’ current valuations.
“You have a huge amount of capital invested on assumptions that are no longer valid,” one major industrial investor told the Financial Times.
They warned that a record amount of acquisitions totaling more than $1 trillion were made in 2021, just before interest rates rose, and many deals are at overly optimistic valuations on companies’ books.
Goldman Sachs noted in a recent report that sales of private equity assets, which historically occurred at a premium of at least 10 percent to funds’ internal valuations, have been occurring at discounts of 10 to 15 percent in recent years.
“(Private) equity is generally still overvalued, which means assets are still stuck,” Michael Brandmeyer of Goldman Sachs Asset Management said in the report.
