The state of private equity: A lookback at Q2 2024

The current PE industry watchword is “stabilizing.” At the end of Q2 2024, observers are crossing their fingers that the elusive bottom may have been reached, although exits remain stubbornly stuck in the mismatched price expectations of sellers and buyers. Fundraising has been healthy but may be about to take a break, while deal-making activity looks to be up 12% year-over-year, once quarter-end transactions are included. But what will it take to get distributions going and clear out those portfolios?

Here’s what the PitchBook Q2 2024 US PE Breakdown says about the current state of private equity.

The first half of 2024 shows PE fundraising ahead of the same period last year. If the second half of the year were to follow the same pattern, 2024 would ultimately rank as the industry’s second-best fundraising year ever.

Unfortunately, it’s unlikely this will be the trend. As PitchBook reported, during the first half of 2024, five $20+ billion megafunds closed, accounting for over 47% of the total U.S. PE capital raised. Only one, Blackstone’s flagship, remains in the market, which seems likely to depress fundraising totals for the balance of the year. There are, however, a number of funds with targets lower than $20 billion and “have raised approximately $10 billion or more, [which] could support PE fundraising over the next couple of quarters.”

Although some money is coming in, it’s coming more slowly. PitchBook noted that the median time to close a fund continued its upward trend and reached 18.1 months, ticking up from 2023’s 14.5 months and a mere 11 months in 2022.

The inventory of dry powder fell in 2023 for the first time since 2014. PitchBook’s most recent data (Q3 2023) shows the total overhang at $965.0 billion, down from a peak of $1 trillion at the end of 2022. Almost 60% of this total was raised in 2022 and 2023.

Any hopes of an exit rebound in the first half of 2024 have been consigned to history’s dustbin. At $141.2 billion, PitchBook calculated that the U.S. PE exit value for H1 was essentially unchanged from the same period last year, and the exit count showed an anemic 1% boost. The reasons behind this paltry performance are the same as they’ve ever been: the valuation gap between buyers and sellers and high interest rates.

Despite the poor results, PitchBook’s Madeline Shi writes that advisers have reported increased deal-preparation activity. The increased speed to closure reflects the urgency imposed by funds nearing the end of their lives. Shi’s report also identifies a willingness among sellers to take on more risk by abandoning the “no-seller-recourse” structure that was popular in the go-go market of 2021. This term limited the buyer’s ability to recover losses stemming from the seller’s misrepresentations, such as inadequate disclosure of financial liabilities. Sellers now seem to be tidying up their assets a bit more before putting them on the market, thus speeding the exit process.

In addition, “while there remains a valuation gap…[sellers] are becoming more realistic about pricing” as revenue growth resolutely refuses to pick up speed. While “many businesses have managed to raise margins in recent quarters,” slowing annual revenue growth rates are raising questions about the sustainability of these increases, Shi commented. That said, sellers still show “a persistent reluctance to accept lower prices that will crystallize losses due to purchases made during the frothy market,” according to PWC’s 2024 midyear outlook.

Shi also cited a split between experts on exit projections for the rest of the year. Some think activity will gain strength while others worry that a surge of sponsors will flood the market with assets and depress pricing.

Hope is a tricky thing. It can inspire innovative responses to challenges. But it can also create a state of stasis as actors await a much-desired change. Clearly, the PE industry has been waiting and hoping for interest rates to fall—and waiting. And hoping. According to PWC, “a near-term reduction in rates appears increasingly unlikely, and a return to the low-rate environment of the last 15 years seems out of the question.” PE had never experienced the near-zero interest rate environment of the past decade and a half, and it still succeeded. For the second half of 2024 to be anything more than a repeat of the last 18 months, PE players must give up the idea that transactions cannot occur unless interest rates are close to zero.

As many commenters have observed, it’s time for PE to roll up its sleeves and start creating value in its portfolio companies rather than relying on financial engineering or multiple expansions. By linking deals and operations teams to develop deeply researched transformational plans, firms can make their assets worth more at exit than at entry regardless of the interest rate. That’s how TPG saved Continental Airlines, and Blackstone turned Equity Office Properties into one of its most profitable deals. This market is proving the old adage true: Hope is not a strategy.

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