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Private equity funds took in only half the value of investments they usually sell in 2024, marking the third year in a row that payments to investors have fallen short due to a shortage of deals.
Buyout companies typically sell 20 percent of their investments in a given year, but industry executives predict cash payouts for the year would be about half that figure.
Cambridge Associates, a leading advisor to large institutions on their private equity investments, estimates that funds have missed out on payments to their investors by about $400 billion over the past three years, compared to historical averages.
The data underscores growing pressure on companies to find ways to return cash to investors, including shedding more investments in the coming year.
Companies have struggled to strike deals at attractive prices since early 2022, when rising interest rates led to higher financing costs and lower company valuations.
Dealmakers and their advisers expect mergers and acquisitions activity to accelerate in 2025, potentially helping the industry overcome what consultancy Bain & Co. called a “towering backlog” of 3 Trillion dollars of aging deals that need to be sold in the coming years.
Several large IPOs this year, including food shipping giant Lineage Logistics, aviation equipment specialist Standard Aero and dermatology group Galderma, have given private equity executives the confidence to take companies public, while that the election of Donald Trump has added to the exuberance of Wall Street.
But Andrea Auerbach, global head of private investments at Cambridge Associates, warned that the sector’s problems could take years to resolve.
“It is expected that the wheels of the exit market will begin to turn. But it won’t end in a year, it will take a few years,” Auerbach said.
Private equity firms have resorted to new tactics to return cash to investors as their stakes have proven difficult to sell.
They are increasingly using so-called continuation funds – in which one fund sells a stake in one or more portfolio companies to another fund managed by the company – to organize exits.
Jefferies predicts there will be $58 billion in continuation fund transactions in 2024, representing a record 14 percent of all private equity exits. These funds accounted for just 5% of all outflows during the boom year of 2021, Jefferies found.
But some private equity investors doubt the sector will be able to sell assets at prices close to current fund valuations.
“You have a huge amount of capital that has been invested on assumptions that are no longer valid,” one major investor in the sector told the Financial Times.
They warned that a record buyback of more than $1 trillion was reached in 2021, just before interest rates rose, and that many deals are on company books at overly optimistic valuations .
Goldman Sachs recently noted in a report that sales of private equity assets, which historically occurred at a premium of at least 10 percent over the funds’ internal valuations, have been conducted in recent years at discounts of 10 to 15 percent.
“[Private] stocks in general are still overvalued, which leads to this situation where assets are still stuck,” Michael Brandmeyer of Goldman Sachs Asset Management said in the report.
