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Private equity funds are only able to cash in on half of the investments they would normally sell in 2024, leaving investors short on payments for the third year in a row due to a deal drought.
Buyout houses typically sell 20% of their investments in a given year, but industry executives expect annual cash payments to be about half that.
Cambridge Associates, a leading advisor to major institutions on private equity investments, estimated that funds were underpaid by about $400 billion to investors over the past three years compared to the historical average.
The data highlights growing pressure on companies to find ways to return cash to investors, including by exiting more investments over the coming year.
Companies have struggled to strike deals at attractive prices since early 2022, when rising interest rates pushed up financing costs and depressed corporate valuations.
Dealers and their advisors expect merger and acquisition activity to accelerate in 2025, with consulting firm Bain & Company saying $3 trillion in obsolete assets will need to be divested in the coming years. This could help the industry overcome a “huge backlog” of transactions.
While several big public offerings this year, including food transportation giant Lineage Logistics, aviation equipment specialist Standard Aero and dermatology group Galderma, have given private equity executives the confidence to take companies public, Donald The election of Mr. Trump further increased the activity on Wall Street.
But Andrea Auerbach, global head of private investments at Cambridge Associates, warned that the industry’s problems could take years to resolve.
“There is an expectation that the wheels of the exit market will start turning, but it won’t happen in a year, it will take several years,” Auerbach said.
Private equity firms have used novel tactics to return cash to investors as selling their holdings proves difficult.
They are increasingly using so-called continuation funds (in which one fund sells shares in one or more portfolio companies to another fund, which the company manages) to orchestrate an exit. .
Jefferies predicts that continuing fund transactions will reach $58 billion in 2024, representing a record 14% of all private equity exits. Such funds accounted for just 5% of all exits in 2021, a booming year, according to Jefferies research.
But some private equity investors are skeptical that the industry will be able to sell assets at prices close to the funds’ current valuations.
“There is a huge amount of capital invested based on assumptions that are no longer valid,” one major industry investor told the Financial Times.
They warned that more than $1 trillion in record acquisitions took place in 2021, just before interest rates rose, with many deals being written on companies’ books at overly optimistic valuations.
Goldman Sachs said in a recent report that sales of private equity assets have historically been done at a premium of at least 10% to the fund’s internal valuation, but in recent years have been done at discounts of 10% to 15%. He pointed out that
“(Private) equity in general remains overvalued, which has led to a situation where assets remain stuck,” Michael Brandmeier of Goldman Sachs Asset Management said in a note. .