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Private equity funds cashed out half the value of the investments they normally sell in 2024, the third year in a row that investor payments were delayed as deals dried up.
Buyout houses typically sell 20 percent of their investments in any given year, but industry executives expect this year's cash payouts to be about half that number.
Cambridge Associates, a leading advisory firm to large institutions on their private equity investments, estimates that funds have fallen short by about $400 billion in payments to their investors over the past three years compared to historical rates.
The data underscores growing pressure on companies to find ways to return cash to investors, including by exiting more investments next year.
Companies have been struggling to strike deals at attractive prices since early 2022, when rising interest rates caused financing costs to rise and company valuations to fall.
Dealmakers and their advisors expect merger and acquisition activity to accelerate in 2025, which could help the industry work through what consulting firm Bain & Co. described as a “massive backlog” of $3 trillion of legacy deals that must be sold in the coming years.
Several large public offerings this year, including food transportation giant Lineage Logistics, aviation equipment specialist Standard Aero, and dermatology group Galderma, have given private equity executives confidence to take companies public, while the election of Donald Trump has added to the vitality Wall Street.
But Andrea Auerbach, global head of private equity at Cambridge Associates, warned that industry issues could take years to resolve.
“There is an expectation that the wheels of the exit market will start turning. But it does not end in one year, it will take two years,” Auerbach said.
Private equity firms have used new methods to return cash to investors, while selling their holdings has proven difficult.
They have increasingly used so-called continuation funds – where one fund sells a stake in one or more portfolio companies to another fund to another fund managed by the company – to engineer exits.
Jefferies predicts there will be $58 billion of ongoing fund deals in 2024, representing a record 14 percent of all private equity exits. Such funds accounted for just 5 percent of all exits in the 2021 boom year, Jefferies found.
But some private equity investors question the industry's ability to sell assets at prices close to the funds' current valuations.
“You have a huge amount of capital invested on assumptions that no longer hold,” one major investor in the industry told the Financial Times.
They warn that a record high of more than $1 trillion in acquisitions was made in 2021, just before interest rates rose, and many deals are on companies' books at overly optimistic valuations.
Goldman Sachs recently noted in a report that sales of private equity assets, which were historically made at a premium of at least 10 percent over the funds' internal valuations, have in recent years been made at discounts ranging between 10 and 15 percent.
“(Private) stocks are generally still too high, leading to this situation where assets remain stuck,” Michael Brandmeier of Goldman Sachs Asset Management said in the report.
