Private equity payouts drop 50% by 2024

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Private equity funds cashed out just half the value of the investments they typically sell in 2024, the third straight year payouts to investors have fallen due to deal drought.

Acquirers typically sell off 20% of their investments in any given year, but industry executives predict that cash payouts for the year will be less than half that amount.

Cambridge Associates, a leading adviser to large private equity institutions, estimates that funds have fallen about $400 billion in payments to investors over the past three years compared to the calendar average. history.

The data underscores growing pressure on companies to find ways to return cash to investors, including exiting more investments in the coming year.

Companies have struggled to strike deals at attractive prices since the start of 2022, as rising interest rates caused financing costs to rise and corporate valuations to decline.

Dealmakers and their advisers expect mergers and acquisitions activity to accelerate in 2025, potentially helping the industry through what consultancy Bain & Co. called a “towering backlog” of $3 trillion in old deals that must be sold in coming years.

Some of the major public offerings this year including food trucking giant Lineage Logistics, aviation equipment specialist Standard Aero and dermatology group Galderma have given executives HR is confident to take companies public, while Donald Trump’s election has added to the euphoria on Wall Street.

But Andrea Auerbach, global head of private equity at Cambridge Associates, warns 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 several years,” Auerbach said.

Private equity firms have used new tactics to return cash to investors as stock holdings prove difficult to sell.

They have increasingly used so-called continuation funds – in which a fund sells shares in one or more portfolio companies to another fund that the firm manages – to design exit.

Jefferies forecasts that there will be $58 billion in continued fund transactions in 2024, representing a record 14% of total private equity exits. Jefferies sees such funds accounting for just 5% of total drawdowns in 2021’s boom year.

However, some private equity investors are skeptical that the industry can sell assets at prices close to the funds’ current valuations.

“You have huge amounts of capital that have been invested based on assumptions that are no longer valid,” one major industry investor told the Financial Times.

They warn that a record of more than $1 trillion in buybacks will be reached in 2021, just before interest rates rise and more deals hit companies’ books at overly optimistic valuations.

Goldman Sachs recently noted in a report that sales of private equity assets, which were previously carried out at a premium of at least 10% over the funds’ internal value, in recent years This was done at a 10-15% discount.

“[Private] Equity in general remains overvalued, which results in assets remaining stranded, Goldman Sachs Asset Management’s Michael Brandmeyer said in the report.