At the start of 2024 private equity firms were hoping that market conditions would align in a way that would make it easier for them to exit their assets and realize above-market gains.
But through the first three quarters of the year, geopolitical uncertainties continued to weigh on public markets, interest rates remained high, and currency fluctuations prevailed. With GPs and other sellers holding firm on asset valuations, the investment cycle largely stalled.
Analysis from Bain revealed that at the end of 2023, the private equity sector globally was sitting on a record 28,000 companies with a collective value of more than USD3 trillion. The proportion of those assets held for more than five years was 18% higher than in 2022.
The extent of the squeeze has been visible in market data showing that continuation funds were responsible for 43% of the USD72bn in secondary deals completed in the first half of 2024.
But as we head towards 2025 there are signs the tide may be turning, albeit at different speeds across the world.
Here, we round up developments in six key markets.
United States: optimism, on the rise since September, increases further
U.S. deal activity and sentiment began to turn positive in Q4, buoyed by the U.S. Federal Reserve’s 50-basis-point cut in interest rates in September.
As expected, the fall triggered increased deal flow, with the lower cost of capital helping buyers bridge the valuation gap with stubborn sellers.
The positive vibes have only grown since the U.S. election, with widespread optimism that the new administration’s policies will spur further M&A. Hopes that Donald Trump will pursue tax cuts and launch a wave of deregulation starting in January have been strong drivers of confidence in increased dealmaking and investment.
The new President is expected to introduce corporate tax cuts aimed at freeing up capital for businesses, making it easier for them to consider acquisitions as part of their growth strategies. Deregulation, which will be a major focus for Trump, should generally improve the business environment, particularly for the energy, finance and telecommunications industries.
There are also expectations that the new administration will take a more pro-deal approach to merger review. (You can read more about the impact of the new administration on M&A here).
Consequently, businesses are likely to be more confident in pursuing large-scale mergers, roll-up strategies and other acquisitions.
Recent macro data may cause the Fed to take note before cutting rates further – November’s inflation figure showed a slight increase to 2.7%, which while in line with expectations, is a sign that the external outlook remains volatile. However, the general view is that this is unlikely to dampen what is expected to be a strong M&A market in 2025.
The U.S. IPO market is trending upwards, with listings by businesses including Reddit and cruise operator Viking among deals that raised more than USD26bn in New York during the first three quarters of 2024, more than the annual total for 2023.
Continental Europe: exit values rise 90% quarter-on-quarter
Portfolio companies sold by European private equity firms in 2023 had been held for an average of six years, more than a year longer than in 2020 when exit rates were at their height.
Data from MSCI reveals that 36% of PE assets acquired six or more years ago are now worth the same or less than when they were bought. Another third (34%) are valued at between 1.0x and 2.5x invested capital. This dynamic is contributing to lower internal rates of return (IRR), with Pitchbook reporting that private equity’s annualized IRR sat below 10% in the year to March 2024. The typical target is 25%.
Despite this, European PE exit values in Q2 were up 90.3% quarter-on-quarter, driven by 23 mega-exits which accounted for more than half of this total. Of those, ten were IPOs, indicating that the congested listing pipeline may finally be starting to move. 2024 is on course to be the best year for PE-backed IPOs globally since 2021 in terms of both deal count and value, and supports the signs we are seeing of an uptick in activity across Europe’s capital markets.
Anecdotally, Amsterdam is growing in popularity among issuers, thanks to the Netherlands’ favorable corporate laws and tax regime.
Some sponsors are also executing dividend recapitalizations to fund distributions to investors. Belron, the U.K. headquartered vehicle glass repair company owned by Belgian conglomerate D’Ieteren and a consortium of PE firms, is set to borrow EUR6.25 billion and add in some of its own cash to finance a EUR4.3bn special dividend.
Upon completion, Belron’s investors will have seen more than a third of their original investment returned through dividends. The deal is reportedly the biggest ever dividend recapitalization and follows another, smaller dividend recap that Belron executed in 2021.
United Kingdom: rise of hybrid capital providers
There have been some eye-catching U.K. exits over the past 12 months, not least Advent’s sale of delivery business Evri to Apollo and several sponsor-backed take private transactions such as Thoma Bravo's acquisition of Darktrace.
Tech, AI, professional business services, data centers and climate equity/energy transition assets continue to attract significant PE interest, but the success of sale processes in other segments of the market really depends on the quality of the business and price expectations of the selling sponsors or corporates. A material number of deals are still being pulled where sponsors would struggle to achieve their targets.
Dividend recapitalizations and continuation funds are consequently a continuing theme in the U.K. On the former, sponsors are carrying out refinancings involving either new senior lenders on their own and/or hybrid capital providers who inject debt and/or preferred equity.
Hybrid capital firms are also providing financing through preferred equity in a number of other scenarios, including part financing for take privates and as an alternative capital solution for corporates.
Japan: currency volatility creates winners and losers
Following the prevailing global trend, Japan-focused funds have targeted more new investments than exits in recent months.
Japan’s central bank raised interest rates to 0.25% in 2024 (its first increase since 2007), making domestically sourced debt cheap relative to financing from other markets. However, the yen has also been sliding against the dollar, leading to falls in the value of Japanese assets bought by foreign funds that account in dollars. On the flipside, Japanese PE firms that have bought assets overseas and account in yen have seen the value of their investments rise on the back of the same currency movements.
The high cost of debt globally is driving many firms to emphasize operational engineering over leverage as a way to boost returns. This is shifting investors’ focus away from purely cash-generative assets towards underperforming businesses. Salaries are one of the biggest corporate costs, and workforce restructurings are an effective way to increase the value of the business. But Japan’s worker-friendly employment laws make it a difficult market in which to execute such schemes.
Looking ahead, hopes have been raised of a rebound in IPO activity following the USD2.3 billion listing of Tokyo Metro. The deal was Japan’s biggest IPO since 2018, with the sale of shares to retail investors oversubscribed by a factor of ten.
Australia: blockbuster sale sparks interest in data centers
The prevailing trends in Australia are similar to the rest of the world, with 2024 marked by more deliberate dealmaking strategies.
A significant factor influencing this activity is the prevailing macroeconomic environment, particularly variable interest rates and stubborn inflation. In response, we have seen a notable shift towards prioritizing investments that offer strategic advantages.
Despite these challenges there are opportunities to be found, with noteworthy transactions in sectors including healthcare, technology, infrastructure and energy and resources. A prime example is Blackstone’s deal for the Sydney-headquartered pan-Asian data center operator AirTrunk, which valued the business at AUD24 billion. The acquisition has sparked huge interest in similar assets, and we have seen more deal processes in this space kicking off over recent months.
Looking ahead, dealmaking is expected to increase sharply once monetary policy eases. The pressure to generate returns for both funds and their investors is intensifying given the slate of overdue sales, where interim solutions such as continuation funds have become less attractive.
Australia is also expected to gain from cross-border M&A activity as foreign investors, particularly from the U.S. and Asia, maintain their interest thanks to Australia's stable regulatory framework, a strong dollar, and Australia’s strategic position as a gateway to the APAC region.
Consequently, we anticipate a sustained trend of PE portfolio exits into 2025, with a focus on the hot sectors of 2024 and emerging segments such as AI and defense where we are seeing an uptick in inquiries.
ASEAN: U.S. megafunds bullish on future activity
ASEAN portfolio companies that should now be coming to market include those bought between 2017 and 2019, when financial sponsors had a heavy focus on consumer and tech, both sectors that have seen a fall in valuations from their pre-pandemic height.
The retreat of North American investors from China has boosted other markets across the Asia Pacific region, with U.S. megafunds remaining publicly bullish about their desire to invest more in Japan and ASEAN countries such as Indonesia and Vietnam.
The secondaries market has been quiet with asset owners not yet willing to compromise on value to reshape their portfolios, but we expect activity to rise over the next 12 months as sponsors look to raise new funds on the back of realized gains.
At the same time, sponsors are launching processes to sell non-controlling stakes in premium assets especially in the energy and infrastructure sectors where pricing and demand remain high.
We are also seeing capital solutions funds enter the market to support with deal structuring. The ASEAN private credit sector remains immature relative to the U.S. and Europe; funds have shown interest in the region for many years but only now are they starting to get comfortable with the credit risk they face under ASEAN countries’ fragmented and often complex legal regimes.
Singapore remains ASEAN’s de facto financial hub, but its stock market is small and relatively illiquid. Businesses have often established their ASEAN headquarters in the city state but are increasingly redomiciling to their home markets in order to exit their investments on local exchanges.
The number of Indian companies following this path is gaining pace, with recent tax and regulatory reforms from the government in Delhi making it more attractive for founders and sponsors to “reverse flip” their businesses in search of higher valuations. These deals see shareholders swap their existing equity for shares in an Indian entity, with the original structure either dissolved or merged into the newly established business. This allows the newly registered company to go public on the buoyant Indian markets.
