5 minute read 11 Jan 2024

Private Equity Pulse: key takeaways from Q4 2023

5 minute read 11 Jan 2024
Related topics Private equity IPO

Private Equity closes 2023 on a strong note.

In brief
  • The year closed on a strong note, with firms announcing deals valued at US$124b, making it the most active quarter of the year by value.
  • PE remained resilient in 2023, as firms opportunistically deployed capital across a range of verticals, asset classes, and transaction types.
  • Higher interest rates will continue to elevate the value of operational value-add.

Private equity (PE) remained resilient in 2023, as firms opportunistically deployed capital across a range of verticals, asset classes, and transaction types.

This was an opportunity for some funds to acquire top-tier assets at discounted valuations, while for others macro dynamics yielded openings to enter new markets.

The year closed on a strong note, with firms announcing deals valued at US$124b, making it the most active quarter of the year by value. Activity was up 11% by value in Q4 versus Q3.

November in particular was a busy month – it was the second-most active month of the last year and a half, with an aggregate US$71b in deal announcements. Volume in Q4 remained relatively consistent with prior quarters, underscoring the degree to which larger deals are becoming increasingly common.

Overall, multiple factors challenged the mergers & acquisitions (M&A) market in 2023, with inflationary headwinds, rising interest rates, geopolitical unrest and general macro uncertainty all leading to many dealmakers stepping back from transacting. Despite these challenges, PE remained an active participant in the M&A markets, accounting for 25% of aggregate M&A activity.

NextWave Private Equity Podcast

New episode: key takeaways from 4Q 2023

Listen now

Activity in the first half of the year was defined almost exclusively by larger take-privates and smaller bolt-ons.  As the year progressed, announcements broadened to include a growing array of secondaries, carve-outs, and private-to-privates. As 2024 begins to unfold, market participants expect many of these deal types to continue. While take-privates have fallen from their Q1 peak, a compelling population of attractive targets remains. The fourth quarter, for example, saw a number of take-privates including Blackstone’s acquisition of Adevinta; at US$15b, it was one of the largest deals announced last year.

Although higher interest rates have made financing deals more challenging, investors also expect them to be a tailwind for certain types of activity in the coming year. In the US, the leveraged loan default rate sits below its long-term average (at about 1.4%); however, pressure is building across parts of the system. S&P’s Weakest Link Index (comprised of issuers that are rated B- or below that have a negative outlook or implication), has grown by more than 50% over the last 12 months, and interest coverage ratios for have been falling steadily as well, to 3.8x (down from 5.6x last year) according to Pitchbook Leveraged Commentary and Data. These dynamics open opportunities for PE firms with dry powder and the proper expertise to assist companies through volatile macro periods.

In a survey of PE investors conducted by EY in late November and early December, 63% of respondents expect an uptick in distressed transactions over the next year. Respondents also expect an increase in secondary buyouts - with roughly US$1.3t in PE dry powder available to fund new deals, firm are well-positioned to acquire companies from sponsors seeking an exit and usher them through their next phase of growth.  As one survey respondent said, “I expect private equity to face some headwinds in 2024 due to high inflation, rising interest rates, and a potential macro slowdown. However, PE firms with capital to deploy should still find select opportunities, especially in distressed assets, as the environment shakes out weaker companies."

PE firms with capital to deploy should still find select opportunities, especially in distressed assets, as the environment shakes out weaker companies.
Respondent to EY PE Pulse Q4 Survey

From a sector perspective, tech remained a strong theme throughout the year, comprising almost one-third of PE investment by value. Investments in cloud remained an active category, with investors expecting areas such as enterprise SaaS to have considerable runway left for additional growth, while machine learning saw accelerating momentum as businesses across the globe worked to embed generative AI (GenAI) into their operational processes.

Consumer, financial services, and health were other active spaces. In consumer, investors found opportunities in low-risk, moderate-yield businesses across the food and agribusinesses value chain, such as sustainable farming, combined agriculture, and timber.

In health, the enterprise imaging space, voice-based diagnostics and other med-tech platforms with innovative products and service offerings have seen growing attention from PE.

Overall, firms expect a more active 2024 for transactions – 63% of survey respondents expect an increase in activity over the next six months; just 17% expect a decline. Notably, 20% of respondents expect a marked increase in activity of 25% or more; this was up seven percentage points from when the same question was posed three months ago.

Exits continue their slow recovery

In aggregate, PE firms announced 298 exits valued at US$355b over the course of the year, a decline of 28% by volume versus the year prior. In contrast to the buyside, exit activity in Q4 was constrained versus the second and third quarters, which were marginally more active.

As a result, the industry continues to see a significant focus on liquidity through alternative paths, including secondary transactions – both GP-led and LP-led – as well as fund-level facilities that allow sponsors to support portfolio companies through longer-than-expected hold periods, and in some cases facilitate distributions back to investors. These having become essential parts of the PE toolkit, that interest is likely to continue in the new year. In our survey, GPs cited a continued increase in secondary sales and continuation funds as their leading prediction for 2024.

The downstream effects are most significant in the raising of new funds. Overall, fundraising was roughly flat versus last year, but remains down from the market peak in 2021. Looking ahead, fundraising tops the list of investors’ concerns for the coming year – ahead of valuations, the macro environment, interest rates, and portfolio-level issues.

Private credit’s tipping point

While private credit’s rise has been a long time in the making, 2023 was the year it broke through into mainstream attention. With diminished appetite from banks and other traditional lending sources, private credit firms have stepped in to provide capital for a wide range of needs, including the bulk of PE transactions announced last year. LP surveys consistently rate credit as a top priority for increased allocations (typically alongside private equity and infrastructure). New vehicles and new RFPs (request for proposals), from LPs looking for new credit managers are announced almost weekly, and news coverage of the space has increased almost exponentially. Last year, private credit funds financed approximately 86% of LBOs according to Pitchbook Leveraged Commentary and Data, and currently have more than US$950b in dry powder to deploy against new deals.

As a result, 2024 should see continued rapid evolution in the space, driven in part by increased banking reserve requirements that make syndicators more selective about the deals they pursue, and from private credit lenders increasing the scope and breadth of their businesses. In that way, it mirrors the shift seen in capital formation on the equity side over the last 15-20 years, wherein for an increasing number of companies, the financing modality of choice is private capital.

What might 2024 bring?

While macro impediments are likely to continue to represent meaningful - albeit waning - headwinds for PE investors, the coming quarters are also likely to yield tremendous opportunities for firms with diversified platforms, flexible approaches, and the depth of experience required to capitalize on an investment landscape that require looking at the PE playbook through fresh eyes. As one survey respondent put it, “2024 is a year when vintages will be made."

2024 is a year when vintages will be made.
Respondent to EY PE Pulse Q4 Survey

In our survey, investors expect private credit to remain a dominant form of financing; for secondary sales to remain an active and viable portfolio management tool; for industry consolidation to increase; and for tech to remain a dominant investment theme through 2024.

  • Open image description#Close image description

    Interactive bar chart showing results from the EY PE Pulse Survey, which includes ways investors think PE will be different next year. On a scale of 1-10 how much did the survey respondents agree or disagree with each statement.

  • Survey results

    • More financing will shift back to the syndicated markets from private credit:
      When banks stepped away 18 months ago from lending for many PE deals, private credit providers filled the gap. As markets begin to normalize, it’s an open question as to how much of those market share gains for private credit providers persist, and to what degree banks will be willing and able to reassert themselves in the syndicated lending space. The fact that respondents ranked this lowest on the list suggests that in the eyes of many, private credit’s markets gains are here to stay.
    • IPOs will increase from 2023 levels:
      IPOs remain muted, between both PE-backed companies and the IPO market more broadly. 2024 could see the window widen by offering buyers more reliable returns as rates begin to stabilize. Nonetheless, firms will continue to pursue multi-track approaches to ensure alternatives are available.
    • Higher interest rates will predicate an LP shift from private equity to private credit:
      Respondents are lukewarm as to whether a “higher for longer” rate regime will predicate a shift from private equity to private credit. Anecdotal observations suggest that while LPs are indeed shifting additional allocations to private credit, they’re pulling from other parts of the pool. 
    • Commercial real estate will offer compelling buying opportunities:
      Higher rates, challenges in the retail space, and slower-than-expected return-to-office trends have pushed asset values lower across many sectors in commercial real estate. While it’s not ranked the highest in our survey, it’s clear a number of investors see opportunity this year.
    • Alternative financing arrangements and investment structures will proliferate:
      Creative financing structures have become more common as interest rates have increased and financing has become more difficult to arrange. According to LCD, LBO equity contributions hit 51% in 2023, their highest on record, while debt multiples dropped to 5.3x, a post-GFC low. PE firms will look for solutions in earn-out provisions, deferred payments, seller-financed notes, and other types of financing structures.
    • Consolidation across GPs will increase:
      2023 saw a number of marquee mergers between private capital firms, including TPG’s US$2.7b acquisition of Angelo Gordon. As the industry matures, as competitive pressures build, and as diversified product lineups become more important, inorganic growth will become an increasingly important part of the GPs’ playbooks.
    • Tech will remain a dominant investment theme:
      Technology has been a dominant investment theme, accounting for x% of aggregate PE investment by value over the last five years. Despite headwinds from increased costs of capital, investors expect heavy tech investment to continue this year, driven by strong secular underpinnings. 
    • Secondary sales and continuation activity will increase:
      The long-term secular growth in the secondary market is being accelerated by macro conditions that have made traditional exit routes more challenging. Even as conditions normalize, growth in this space is expected to persist as it becomes increasingly integrated into the GP/LP toolkit. 

Firms are continuing to embrace sustainability, with many looking at environmental, social and governance (ESG) as a critical value creation lever. When GPs were asked to rate the degree to which they're leaning in on ESG and sustainability as a value creation lever on a scale of one to five, almost 60% rated themselves 4-5, with 30% saying they're looking holistically at ESG to help drive deal metrics and that they expect a measurable ROI.

Lastly, higher interest rates will continue to elevate the value of operational value-add. Results from our survey are very clear – when asked about the relative contribution of return levers for deals exited two years ago versus deals expected to exit over the next 24 months, respondents anticipate a strong pivot from multiple expansion to operational value-add.


PE remained resilient in 2023, as firms opportunistically deployed capital across a range of verticals, asset classes, and transaction types.

The year closed on a strong note, activity was up 11% by value in Q4 versus Q3.

About this article

Related topics Private equity IPO