Private Equity Pulse: key takeaways from Q1 2024

Sponsor-to-sponsor deals see uptick amid continued exit drought

As hold periods continue to increase – in the US, for example, average hold periods hit 5.3 years last year – pressure continues to build for realizations. While many corporates remain more focused on selling – in particular, carving out noncore divisions – sponsors have been more active in acquiring PE assets. Q1 saw the value of secondary exits rise 27% versus Q4. In aggregate, secondaries accounted for 26% of exit activity by value in Q1, marking the highest level of the last year.  

As secondaries come to the forefront, and as the IPO window appears to crack open again with the launch of Reddit and Astera Labs, market participants expect an increase in exit activity in the coming months. In December, roughly one-third of survey respondents expected exit activity to increase; presently, 50% of GPs expect exits to move higher in the coming months, while another 23% expect them to stay in line with current levels. 

In the meantime, both LPs and GPs are pulling available levers to facilitate liquidity – trading interests on the secondary market, participating in continuation funds, and in some cases, using NAV loans to help facilitate distributions. 

Outlook – rate trajectories could impact deployment activity

One tailwind for activity in the coming quarters is the increased availability of financing. Over the last 18 months, traditional lending sources have had limited appetite for PE transactions, allowing private credit firms to step into the gap. Last year, private credit funded roughly 85% of PE transactions. 

The last several months, however, have seen traditional lenders reassert themselves amid stabilized rates and increased demand from buyers of leveraged loans. The market has seen a number of high-profile deals bid by both banks and private credit firms, a dynamic that is likely to continue over the balance of the year. 

Survey respondents point to expectations for continued stability in the credit markets – when asked six months ago, one-third expected credit conditions would improve, one-third expected them to stay the same, and another third expected conditions to deteriorate. Currently, however, GPs are increasingly optimistic – close to 90% expect credit conditions to either stay where they are or improve.

However, GPs also expect that rates will stay higher for longer. In our survey, more than 60% of GPs think central banks will cut more slowly than what the market is anticipating. 

In aggregate, as macro uncertainty continues to abate and a soft landing increasingly becomes the base case forecast, the conditions for a more active market are primed. However, firms will continue to remain conservative in their underwriting of potential transactions in order to ensure that value creation plans are able to support the modeling across a broad range of rate scenarios.