waiting for a recovery after a difficult 2023

Although 2023 represented, for the Global Private Equitythe steepest decline since the global financial crisis, the sector is seeing increased activity in 2024, with some positive signals emerging.
This trend is highlighted by the 15th annual Global Private Equity Report Bain & Company. “The market is off to a slightly better start this year, and we are cautiously optimistic about its prospects for 2024. The scale and speed of rate hikes last year, and the uncertainty of the macro environment, – Roberto Fiorello, senior partner and head of Italian Private Equity at Bain & Company – represented a shock to the sector in 2023. However, the long-term outlook for the industry remains solid, and with rates set to recalibrate in the coming months, c ‘is a greater context of stability. Liquidity levels are very high, and although key challenges persist, deal flow is strengthening.”

Financing costs

In 2023, Private Equity continued to be impacted bysurge of interest rates: Financing costs increased by 525 basis points from March 2022 to July 2023, the fastest tightening recorded in recent decades, resulting in strong drops in investment operations, exits and fundraising. In particular, the value and number of deals decreased by 60% and 35% respectively compared to the peaks of 2021, with a slightly better performance in the second half of the year. The value of buyout investments fell by 37% year on year to 438 billion euros, the worst value since 2016. Even the value of the exits it contracted by 66%. “The industry has never seen anything like what has happened over the last 24 months. The drops – continues Fiorello – are similar to those recorded in conjunction with the global financial crisis, but the situation today is completely different from what happened then. THE buyout funds today they record 1,200 billion dollars of liquidity, a quarter of which have been in the portfolio for more than four years: we expect operators to return to the field. With the change we are seeing in the deal landscape, standing still is not an option. The exit conundrum is now very critical to solve as the market improves: the current threat to investor cash flows and industry liquidity is very real. To get out of the impasse it will be necessary for GPs to take charge of their own destiny in terms of portfolio management to generate greater distribution for LPs”.

The European and Italian panorama

In 2023, we witnessed one significant contraction in transaction values and exits from the Old Continent compared to 2022. The decline was recorded on deals of all sizes, with large transactions – those above 2.5 billion dollars – contracting more rapidly than the others. In Europelast year, there was one decrease in multiples, which has yet to fully offset the increase in interest rates. There liquid assets European reached approx 821 billion dollars in 2023, an 18% increase over the five-year average. The buyout activity European is decreased by approximately 46%, the worst year after 2016. The top 10 largest buyout investments in Europe in 2023 had a combined value of around $64 billion and were made by a diverse range of buyers, two of them in Italy.

In Italythe slowdown recorded in 2023, in terms of both the number and value of transactions – 53% less buyouts compared to 2022 – is mainly due to unfavorable macroeconomic conditions, in line with the global trend. The good performance recorded between 2012 and 2022 clearly shows the evolution of our country towards a more mature market compared to the past. At a local level, we see a more homogeneous distribution of operations by sector compared to the rest of Europe, in line with the Italian economic ecosystem. The share of the technology sector is growing, although still behind European levels.

“The macroeconomic turbulence that characterized last year – inflation, geopolitics, interest rates – have not yet been resolved. They will probably continue to influence investment positions, also in Italy, at least in the first half of the year. However, the flow of operations is strengthening in the country: several assets (especially for the mid-cap segment) are close to exits in 2024, also by virtue of some processes delayed from 2023″, adds Fiorello.

The exit dilemma, slight improvement in IPOs

The exit dilemma has emerged as the most pressing issue for GPs, pushing them to find creative ways to create liquidity for their investors. Lack of predictability is something we have always seen, but this exit impasse and rising interest rates are entirely new issues. The sponsor-to-sponsor releases have been particularly impacted: these transactions are decreased by 47% from 2022, reaching 62 billion of dollars, with private equity buyers put off by higher rates. Meanwhile, the IPO channel – despite representing just 3% of total exit volume – has shown some signs of recovery, at $11.8 billion last year.

The great protagonists of 2023

Two phenomena are affecting the world of Private Equity, with a significant impact on the evolution of the industry. One year after the explosive advent of GenAI, it has become increasingly clear how these technologies are revolutionizing all industries, including Private Equity, with implications at every level of the value chain. In particular, funds are using GenAI as tool at the service of strategy and portfolio improvement, but also as a technology useful for rethinking due diligence, developing scorecard-based protocols to evaluate threats and opportunities related to generative AI and to accelerate and refine the underwriting process. Finally, GenAI offers several opportunities to streamline or automate back-office functions. Not only that: the true power of this technology lies in its ability to drastically expand the field of information that companies use to make investment decisions.

There are other protagonists at the center of the scene of Private Equity activity in 2023: these are the secondary funds. In light of the liquidity crisis in the sector, in fact, it is not surprising that these are grown faster than any other asset class, raising 92% more capital in 2023 than the previous year. While still relatively small in size, in light of the need for liquidity solutions in private capital, this asset class is growing rapidly, with a wide range of tools that LPs and GPs can use to manage the increasingly complex needs of their clients. stakeholders. Their usefulness is measured by backlog (or value) not realized by funds, represented by the 28,000 unsold companies burdening buyout portfolios globally, more than 40% of which are at least four years old. This backlog, 3,200 billion dollars, is at very high levels: its value is quadruple the level of the global financial crisis of 2007-2008. For large investors – such as sovereign wealth funds – the returns and flexibility offered by secondaries will become increasingly attractive. The same could be true for large investment houses, which manage significant wealth on behalf of individuals eager to access alternative classes.

“Experience shows – concludes Fiorello – that in turbulent times, investors who continue to conclude transactions, focusing on high-quality assets, can obtain high returns. Certainly, the current interest rate environment puts pressure on buyout yields. Activism and the construction of value creation plans starting from the due diligence phase are fundamental in this phase. It is essential to demonstrate to your investors that you manage your capital responsibly to get out of the impasse: liquidity is a central issue and must be an absolute priority.”