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Private equity funds issued just half the value of the investments they sold in 2024, the third year in a row that payouts to investors have fallen due to a deal drought.
Homes for sale sell down 20 percent of their investment in any given year, but industry executives estimate that annual cash payments will be about half that number.
Cambridge Associates, a leading adviser to large private equity firms, estimated that funds have dropped about $400 billion in payouts to investors over the past three years compared to historical averages.
The data underscores the increasing pressure on firms to find ways to return money to investors, including issuing additional investments next year.
Firms are struggling to strike attractive rates from the start of 2022, when rising interest rates have caused finance costs to rise and corporate valuations to fall.
Traders and their advisers expect that mergers and acquisitions activity will accelerate in 2025, which could help the business to work with the so-called Bain & Co. called a “huge backlog” of $3tn in aging contracts that must be sold in the coming years.
Several public offerings this year including food trucking giant Lineage Logistics, aircraft equipment specialist Standard Aero and dermatology group Galderma have given private directors the confidence to take companies public, while the election of Donald Trump has added to Wall Street's exuberance.
But Andrea Auerbach, global head of private equity at Cambridge Associates, warned that business issues could take years to work out.
“It is expected that the wheels of the exit market will start to turn. “But it's not over in one year, it's going to take a few years,” Auerbach said.
Private equity firms have used new strategies to return money to investors while holdings have proved difficult to sell.
They have made increasing use of so-called continuation funds – where one fund sells a stake in one company or more of the portfolio of another fund to another fund managed by the firm – to engineer exits.
Jefferies predicts there will be $58bn of ongoing fund deals by 2024, representing a record 14 per cent of all private equity outflows. Such funds made up just 5 percent of all exits in the boom year of 2021, Jeffery found.
But some private investors doubt the business will be able to sell assets at prices close to the fund's current valuation.
“He has a lot of money invested in concepts that no longer work,” a senior venture capitalist told the Financial Times.
They have warned that a record 1tn-plus in purchases is due in 2021, just before interest rates rise, and that many deals are being driven from firms' books in highly credible forecasts.
Goldman Sachs recently noted in a report that sales of private equity assets, which historically have been made at a premium of at least 10 percent to internal valuations, have in recent years been made at discounts of 10-15 percent.
“(Private) equity in general is still overvalued, which leads to this situation where assets are still stuck,” Michael Brandmeyer of Goldman Sachs Asset Management said in a statement.