Five private equity predictions for 2024

Five private equity predictions for 2024

As Private Equity (PE) houses and portfolio companies look ahead to 2024, they anticipate a changing exit landscape, continued hurdles in meeting their investment objectives and ongoing talent challenges. 

2023 did not bring the dealmaking rebound many PE houses and portfolio companies had hoped for. Exit markets were challenging, inflation and interest rates remained high, and many portfolio company boards struggled to meet their investment objectives. Nonetheless, private equity investors have plenty of experience of investing through the cycle and managing change and challenge.

Here is a look at five PE trends that PE houses and portfolio companies will need to consider in 2024.

The pending UK General Election and US Presidential Election may have ramifications for transactions, IPO planning, and exit timing.

According to our latest poll in the US, 49% of PE professionals believe the optimal IPO market won’t return until Q3 2024 and beyond. The advice we are providing in the US is that those planning to pursue an IPO in the coming year should plan to exit in early Q3 before the election. Given the timing of the election, a natural quiet period in November is anticipated, likely followed by a scramble for exits in December into Q1 2025. 

After a dire few years for UK capital markets, the London Stock Exchange and Financial Conduct Authority are looking at various rule changes to make the London markets more attractive, however, it is unlikely these will be available until late in 2024.  Now may not be the time for private equity to exit investments by way of IPO, but it could be worth evaluating IPO exit as a future option and try our IPO readiness tool.

For thoughts on what the 2024 General Election might mean for the UK private equity tax landscape click here.

In 2024, we predict tech will continue to be an attractive sector for PE with robust performance. Technology investments, especially in software and cloud computing, have seen historical growth and record multiples over the past few years. From enterprise software solutions to digital tools for automating employee management, and technologies to streamline supply chain operations — tech investments are outperforming other market segments. 

Much as they did at the beginning of the pandemic, companies across all industries are seeking technology solutions to help them weather continued economic uncertainty. After another year of headwinds, companies see the value in upgrading their digital processes and infrastructure. Those factors, coupled with evolving trends like AI and advanced cloud solutions, make the tech industry especially resilient. 

With dry powder ready to invest, technology investments may prove relatively straightforward to scale and grow. We anticipate PE firms will buy tech platform companies and acquire numerous products to increase value through add-ons. During these acquisitions, firms can leverage economies of scale to drive efficiency, increase margins and accelerate growth.

For further 2024 tech trends, read our blog here.

2023 has been a difficult year for healthcare businesses. Inflation and interest rates have increased the cost of both care and capital.

Healthcare experienced accelerated growth during the pandemic, which has since thrown off valuations. We anticipate more PE firms will buy distressed healthcare businesses in 2024, helping them address healthcare performance problems and recover valuations. PE can provide value by helping healthcare organisations optimise costs and aiding an industry-wide shift to patient-oriented healthcare. 

We will also see PE firms continue to instill operational and financial discipline into their healthcare portfolio companies. This should address the industry’s historically slow adoption of technology. It will also help the industry tackle systemic challenges, such as ageing populations, more efficiently and effectively. It is through close partnerships that value can be realised for both patients and shareholders. 

PE houses are both cautious and curious about the potential impact of AI as demonstrated by the burst of excitement/hysteria around Q2 2023. We predict PE firms will employ AI tools to help them identify and implement cost optimisation strategies and achieve operating efficiencies within their portfolio companies. Specifically, they may use generative AI tools to minimise operational overheads and improve overall back-office efficiency. 

Firms may also engage AI in predictive analyses to tackle workforce planning challenges. 94% of professionals surveyed in the US  say that finding the right people with the right skills has become more challenging in the past year, according to a recent poll undertaken by BDO. 

AI can help companies anticipate staffing needs based on market trends and performance. It may also help companies in making strategic hiring decisions, avoiding unnecessary labour costs and optimising resource allocations. 

Ultimately, both PE houses and portfolio companies are likely to find that leveraging AI can help increase valuations and improve revenue. We anticipate more exploration of its potential in 2024. 

Whenever the markets enter a downturn, cash flow becomes increasingly important. Firms want to know how they can derive more value from their existing investments that they’ve been holding onto longer than anticipated. 

Due to current market dynamics, we expect a continued drop-off in platform deals in H1 2024. Fewer than a quarter of those we surveyed in the US expect M&A activity to involve new platform deals.    Private equity has increasingly used buy and build strategies to facilitate value creation where organic growth is subdued. We expect this trend to continue, particularly as market leaders seize the opportunities to increase market share, shore-up supply chains, strengthen product and service offerings and diversify their markets while lowering average entry valuations.

Carve-outs of businesses that fit less well, however, are an increasingly attractive option to allow firms to free up capital without divesting. While carve-outs are an attractive option, they require experienced leadership. Portfolio companies have faced significant talent challenges in the past year and need more creative ways to invest in talent and ensure they have seasoned leadership to execute carve-outs effectively.

Companies should revisit their staffing strategies in 2024 and consider sourcing talent from outside traditional avenues. They may also explore outsourcing functions or departments like finance or accounting or hiring interim C-suite leaders to help navigate complex transactions. 

What’s our advice?

Private Equity houses need to be creative with how they use the record amounts of dry powder available to them. Firms that meet the inevitable dealmaking challenges of 2024 will need to have strong value creation plans, a comprehensive understanding of risk and a suite of strategies at their disposal.

For portfolio companies experienced leadership, diligent planning and a willingness to pivot will all be key to navigating uncertainty throughout 2024. 

Find out how we can help fund managers position their portfolio companies for success in 2024.


Authors

Jamie Austin

Jamie Austin

Head of Global Private Equity, National Head of Private Equity and Co-head of Life Sciences Corporate Finance
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