By Marc Lino, Senior Partner, Bain & Company
As Hugh MacArthur wrote in the introduction to Bain’s annual 2024 Global Private Equity Report, “The word for this market is stalled.”
Private equity is a cyclical industry and it is currently at the bottom of a cycle. Looking at investments or exits, by count or by value, dealmaking is off by double-digit percentages from where it was at the cycle’s peak in 2021. The best news we can point to today is that dealmaking appears to be bottoming out in 2024. Fundraising, another key measure of the health of the market, is still searching for the bottom.
Focusing on these measures of activity, however, it is easy to miss that private equity is moving forward in many other ways. While dealmaking might be stalled, the industry itself is not. At the recent IQ-EQ Crossroads conference, the panel I participated in, explored key trends currently shaping the future of private capital markets.
Secondaries. Top of mind for both private equity firms and their investors today is liquidity. Today there are over 28,000 active buyout portfolio companies representing more than $3 trillion in unrealised value. Around 45% of those companies are at least four years into their hold period. Generating liquidity from these assets and putting distributions into the hands of limited partners (LPs) is job one for firms today. And the innovative secondaries market is playing a key role. General partners (GPs) are using direct secondaries, continuation funds, and “strips” of portfolios to generate liquidity. EQT has publicly considered holding a “private IPO” – building a book of interested buyers and sellers of an asset within EQT’s existing investor base, and hiring an underwriter to lead negotiations on pricing.
Individual capital. The buzzword “democratisation” came up several times on our panel. And the buzz around opening private capital markets to individual investors will almost certainly get louder. Individual investors hold roughly half of all global wealth, around $150 trillion, but have little exposure to alternative investment funds today. This vast, untapped market has become increasingly attractive to firms seeking to sustain double-digit growth. At the same time, wealthy individuals and their advisors are increasingly drawn to alternative investments as they seek diversification and better returns than public equities offer.
The alternatives markets haven’t been closed off entirely to individual investors over the years. But a number of structural barriers limited their participation—regulation, lack of access, economics, and liquidity constraints. The good news is that’s changing. Regulators are attuned and leaning into the movement. Fund managers are experimenting with new structures and lowering required minimums. Intermediaries are digitizing and streamlining the subscription processes. They are also learning how to service these investors more efficiently.
Strategic M&A. For an industry purpose-built to drive acquisitions, private equity has seen surprisingly little consolidation within its own ranks. This is especially true considering how fragmented it is (more than 15,000 firms) and the fact that there are clear scale advantages to be had. Consolidation has largely been a nonstarter until recently. Often, mergers have foundered on the many levels of integration complexity that arise when private partnerships try to combine.
But all that’s required for strategic M&A to take off is willing buyers and sellers. And the market is seeing an increasing number of both. The race to expand assets under management (AUM) among ever-larger firms is putting pressure on GPs to find new ways to grow, encouraging more firms to give M&A a fresh look. It’s also true that smaller firms are facing higher hurdles to growth as fund-raising becomes more difficult. That is prompting many to consider hitching onto a larger platform. And with more deals being struck, people are gaining confidence that there is a way forward, deals can be done, and consolidation is worth exploring.
The margin imperative. For any business, it is natural during a period of high growth to focus on increasing the top line rather than managing the bottom line. Alternative assets just went through a period of turbo-charged expansion, with approximately 15% annual growth over the past 20 years. Now the tide has turned, and many firms are facing slower AUM growth in the years ahead, shining a light on firm economics.
As such, the best are shifting their focus from pure growth to a more balanced focus on growth and margins at the firm level. Alternative asset managers’ core competency is investing in and managing portfolio assets. Yet increasingly firms are focusing on their own operations and exploring ways to reduce costs. Often that means leveraging third parties – experts whose core capability is streamlining operations. These partners are helping firms scale in a cost-effective way.
The bottom of one cycle is the start of the next. Private equity’s dynamism is already on full display and it’s safe to say the next cycle will certainly look very different than the last. The current environment is challenging, but the industry is hardly standing still.
