The state of private equity: A look back at Q3 2024

Everyone hopes Q3’s results presage a post-election surge to wrap up 2024. PE dealmaking this past quarter lept by 24%—especially since the Fed dropped interest rates by 50 basis points in mid-September, and at least another 25 basis point cut is expected by the end of the year. Exit values are strong, although the count is low. Fundraising has slowed as the megafunds currently raising have closed and new ones are not coming to market, but there’s still a lot of dry powder on hand. And dealmaking

is on track to rank as the third highest on record in terms of both value and count.

Here’s what the PitchBook Q3 2024 US PE Breakdown says about the current state of private equity.

Although PE fundraising for the U.S. seemed to track 2023’s performance closely through the first half of 2024, it has “seemingly hit an air pocket,” in PitchBook’s words, falling to an annualized $315 billion in 293 funds. This pause stems from the drop in distributions, which has left LPs with capital tied in illiquid assets. This has meant large funds from established managers are attracting the limited capital that is available, with megafunds continuing to dominate PE fundraising.

In Q3 2024, PE megafunds made up 45.3% of all capital raised—$27.6 billion—but accounted for only 3.8% of the fund count (2 individual funds), according to PitchBook. Fewer of these megafunds are coming to market, which may weaken fundraising numbers going forward.

Middle market funds (between $100 million and $5 billion) also face a cooling market. Recently, as PitchBook noted, these funds benefited as investors recognized the advantage of smaller funds doing smaller deals in the credit-constrained market. However, the September rate cut may diminish the advantage these funds have enjoyed.

However, even successful funds are taking longer to raise; the median time in the market reached 16.8 months for 2024 year-to-date, up from 14.0 months in 2023 and 50% higher than the 11.2 months in 2022.

The latest data available shows that deals are getting done by reducing dry powder, which fell by 11.9% in 2023, its largest decline ever. The total overhang has dropped to $914.5 billion from a peak of $1 trillion at the end of 2022.

On an annualized basis, exit value for Q3 2024 looks likely to hit $396 billion, the third-highest level in history—even including the anomalous years of 2020 and 2021—driven by a few large IPO exits.

The deal count, which annualizes to 1,378, indicates far fewer deals going liquid.

• Exits to corporates (trade sales) dropped in terms of both value and count for the first time since late 2021, making up 49% of Q3’s non-IPO value and 44% of the count.

• Exits to continuation funds through Q3 2024 surpassed activity in the same period for 2023.

• Sponsor-to-sponsor (secondary buyout) activity comprised 51% of the non-IPO exits in Q3.

Q3’s deal counts hint at a recovery. If performance to date for this year persists, the annualized deal value will hit $864 billion, the third-highest total ever, and the annualized deal count of 8,500 will rank similarly. The number of most deal types—platform LBOs, add-ons, and growth equity—rose by double digits in Q3. The count of growth equity deals continues 2023’s trend of outpacing platform LBOs, thanks to their smaller size and all-equity structure. Only take-privates dropped from last quarter.

Q3’s exit counts are cause for concern. If the count of 1,378 is the “new normal” exit pace, Pitchbook estimated that GPs would need more than eight years to clear out the current inventory of portfolio companies (11,567). To add to the concern, dealmaking seems to be picking up, further increasing inventory. Pitchbook analysis suggests that the annual exit pace needs to increase by more than 50%, to a level exceeding 2,000 per year, to resolve the build-up.

Experts say that the key to accelerating this activity is increasing the number of sponsor-to-sponsor exits, allowing GPs to provide liquidity to LPs and deploy some of the capital they’ve raised. Reacting to the recent interest rate cut, these transactions spiked in Q3, reversing the trend of the past two years when they significantly lagged trade sales.

It’s possible, just possible, that the increased exit and dealmaking activity hinted at in Q3, if boosted by another rate cut, could give PE a late-year surge at the year’s end. With more distributions, LPs might feel more enthusiastic about meeting capital calls and more eager to commit to future funds. The future may just be getting brighter.