
Is the Private Equity Environment Improving?
Private equity managers have recently faced a challenging exit environment for the businesses held in their funds. Inflation, higher interest rates, and economic uncertainty have created headwinds, which have slowed exits and prolonged any release of liquidity for investors. Some of these challenges are now abating. Could private equity exit volume be poised for a rebound?
Private equity is an inherently illiquid asset class. Typically, capital in a private equity fund is invested over 3–4 years, with companies bought being held for around five years before being sold. Investors in a private equity fund might see their initial capital investment paid back by years 7-8, with any “profit” distributed in years 9-12. When exit conditions worsen, these timelines can stretch further.
The recent slowdown in exit activity can be traced back to the post-pandemic economic landscape. Inflation surged following unprecedented stimulus measures. The Federal Reserve’s response included interest rate hikes—over 500 basis points—aimed at achieving a “soft landing.” The higher rates had a pronounced impact on private equity because debt is a major component of most finance buyouts.
Uncertainty left market participants grappling with critical questions: Would inflation slow? Would interest rates climb further? Could the economy withstand these measures without entering a downturn? Many aiming to sell businesses chose to wait rather than accept lower valuations in a turbulent environment. The numbers tell the story. Over the past two years, global private equity exits averaged $408 billion annually across 2,150 transactions, well below average for the period leading up to 2021 and representing a 51% drop in aggregate exit value since activity peaked in 2021.
Despite the recent subdued environment, increased exits may be on the horizon. Private equity “dry powder” reached a record $1 trillion in 2023, signaling pent-up demand for transactions. Managers face significant pressure to deploy this capital before their fund investment periods end. Additionally, interest rate cuts in 2024 provided a positive sign for valuations. Moreover, the completion of the 2024 election cycle has reduced uncertainty. Lina Khan’s fierce scrutiny of mergers and acquisitions had tempered dealmaking, but the appointment of a new FTC chair indicates a more business-friendly approach. Notably, new deal announcements spiked 22% year-over-year in the two weeks following the election, according to Datasite’s Chief Revenue Officer.
While uncertainties remain regarding inflation, interest rates, and the broader economic outlook, optimism grows that private equity investors may see improved distributions. Anecdotally, private equity firms we have spoken with recently have noted that general partners are motivated to deploy capital and capitalize on stabilizing conditions, with many anticipating a rush of activity once markets regain momentum.
Historically, periods of prolonged quiet are often followed by robust dealmaking, as buyers and sellers seek to capitalize on stable conditions. Only time will tell, but early signals suggest that the tides may be turning for private equity’s exit landscape.
Corey Erdoes