Although a global recession, predicted by many experts, did not materialise, 2023 still marked the lowest point for private equity exits in over a decade, according to PitchBook. This decline was largely driven by the same headwinds that analysts believed would push major global economies into negative growth, specifically high interest rates and rising inflation.
Private equity firms with less pressure from investors to generate liquidity have adopted a more patient approach to exits, extending holding periods as they wait for a better time to sell. McKinsey data shows that global PE assets under management (AUM) have reached a record value of over $8 trillion, underscoring the substantial backlog of unrealised value.
Additionally, the cost of borrowing has increased, and in some cases a valuation gap has emerged. High growth companies with strong margins and low reliance on capital expenditures have maintained higher valuations. However, given the increased cost of capital, some valuations have had to adjust.
The challenges facing the UK private equity market mirror broader trends across Europe and the US, where persistent inflation and elevated interest rates have weighed on most major economies. S&P data reveals that global private equity exits totalled $155.3 billion in the first half of 2024, a 26% decline from the $209.4 billion recorded in the same period in 2023.
Investor patience, however, has its limits. Even firms that have weathered the storm may soon feel pressure to return capital to investors. Sluggish M&A and IPO activity have also had a knock-on effect on fundraising for new vintages, as limited partners (LPs) typically expect to see some returns from prior investments before committing to new funds.
There are signs of recovery on the horizon. The Bank of England’s monetary policy has successfully brought inflation to its 2% target (1.7% in September 2024) and the improving economic outlook is starting to unlock the backlog of delayed exits.
Sentiment among dealmakers, including Maven, is improving. Activity in the UK M&A market, particularly from US buyers, has intensified, attracted by high quality assets at competitive valuations (Source: S&P Global). In September alone, our team completed two exits to US investors: MirrorWeb (4x MoM) and Novatus (4.7x MoM).
While inflation remains somewhat volatile, it is now at a much lower level and appears to be under control. Interest rates have also stabilised, and the UK has experienced its first rate cut since the start of the Covid pandemic. These are crucial indicators of improving market confidence, which should stimulate consumer spending and encourage businesses to invest in growth.
Rising interest rates and geopolitical uncertainty had dampened IPO activity globally, but many analysts now see reasons for cautious optimism. A resurgence in IPOs is anticipated from 2025, particularly for private equity backed companies, which will relieve some of the pressure to return capital to investors. Increasing economic confidence, which is boosting investor confidence, is creating the necessary conditions for a functioning IPO market.
Private equity has historically proven its ability to outperform during periods of market volatility. The stabilisation of inflation, the predicted gradual drop in interest rates, and a loosening of restrictive bank lending practices are likely to reignite a new wave of deal-making. A clearer economic picture will also provide both buyers and sellers with greater confidence in pricing deals, ultimately helping to bridge the gap between price expectations.
Furthermore, private equity firms are sitting on unprecedented levels of dry powder, estimated at around £2.6 trillion (Source: S&P Global Market Intelligence). With improving economic conditions, this M&A firepower is poised to make an impact. Combined with the record number and value of assets in portfolios, we are seeing more sellers bringing long held assets onto the market.