2024 Outlook

Global M&A Trends for Private Capital

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  • Insight
  • 15 Minute Read
  • January 23, 2024

Private capital enters a new era of value creation opportunity and dealmaking.

Eric Janson

Eric Janson

Global Private Equity, Real Assets and Sovereign Funds Leader, PwC United States

The outlook for private capital in 2024 is positive, as a more stable investing environment is bringing renewed optimism that M&A activity will steadily pick up in the course of 2024. Dealmaking has had a bumpy ride recently—because of a myriad of macroeconomic, geopolitical and other factors—with M&A volumes and values soaring to record highs in 2021 before dropping sharply during 2022 and 2023 to levels not seen in a decade. Private equity (PE) activity also slowed dramatically in 2023, as inflation put downward pressure on company operating margins and rising interest rates made it harder to earn an acceptable return. Furthermore, the lack of certainty around future cost of capital made it difficult to price deals. PE dealmakers in particular found financing for new leveraged buyout deals challenging as traditional lenders were navigating their own set of challenges.

However, we believe the starting bell is sounding for a resumption in M&A activity in early 2024, given inflation moderating, interest rates expected to decline and recent gains in the stock market. This is good news for private capital sitting on record levels of dry powder but also puts general partners (GPs) under increasing pressure from limited partners (LPs) to invest and make distributions from prior investments. Private capital has approximately US$12tn of assets under management (AUM), almost double what it had in 2019 before the start of the global pandemic, highlighting the significant buildup in unrealised value. It also indicates the need for many of these investments to be exited. We expect many of these investments will come to market in the next 12 months.

Private capital’s extraordinary growth trajectory

Private capital has displayed an extraordinary growth trajectory over the past decade. In a relatively short period of time, it has become a major driver of M&A volumes, and successive rounds of fundraising have created a source of dealmaking capital for years to come. Global private capital dry powder has achieved a compound annual growth rate (CAGR) of 11% over the past 10 years, ending 2023 with a record US$3.9tn—held across private equity, venture capital, real estate, infrastructure, private credit and other private market asset classes.

Note: Other Private Equity includes growth, balanced, fund of funds, secondaries and others
Source: Preqin

Despite the impressive growth, private capital hasn’t been immune to the volatility of the broader M&A markets. Along with decreases in new buyouts and exits, fundraising declined in 2023 by almost 30% compared with 2021 levels. However, many well-established global private capital players defied the prevailing trend, raising their largest funds ever during 2023.

The ability to raise new funding across different asset classes has varied based on LPs’ capital allocation and views around value and growth potential. For example, in 2023 fundraising declined by double-digit percentages across venture capital, real estate and infrastructure asset classes compared with the prior year, whereas buyout firms increased funds raised by 30% over the same period.

LPs view fund performance as the primary factor when evaluating GPs and deciding where to place their commitments. This makes it more difficult for newer funds to raise capital; in addition, we expect a larger number of funds may face challenges due to downward pressure on returns from a combination of factors including the elevated cost of capital, high prices paid for deals made during the pandemic and more difficult trading conditions. As a result, we expect some PE buyout funds to experience difficulties raising funding in 2024, although those with a niche focus have tended to perform well, and larger, more established funds with a proven track record of delivering above average returns will likely continue to be successful. Concerns among LPs about overallocation to private capital are expected to diminish in 2024 as valuations between public and private markets recalibrate. We believe this will lead to LPs maintaining current allocations and the potential for an increased allocation to certain asset classes or geographies and consequently an uptick in overall fundraising.

From a geographical perspective, investors are expected to follow these strategies:

  • an emphasis on continuing to grow and expand in North America
  • a focus on expansion and scaling efforts in Asia, particularly in India, South Korea, Japan and Southeast Asia
  • the Middle East as a source of capital and an investment destination
  • continued focus on mature and opportunistic markets in the UK and Western Europe

"Private capital players understand the need to reinvent their business model. The landscape will evolve from financial engineering to a greater emphasis on sourcing quality deals and creating value through strategic, operational and digital transformation."

Eric Janson,Global Private Equity, Real Assets and Sovereign Funds Leader, Partner, PwC US

Key themes for private capital in 2024

Focus on operational excellence and value creation

With the higher cost of capital, the ability to generate satisfactory returns just got harder. Dealmakers will need to adjust their investment strategies to maximise the return potential of every deal. To deliver on value creation potential—on both the buy and sell sides—private capital investors will need to build or enhance their own capabilities.

The emphasis will be on defining, validating and executing very targeted and robust value creation plans centred around improving business performance, enhancing revenue generation and growth solutions, and improving balance sheet optimisation. This will require investors to bring deep and consistent functional and sector expertise, tech-enabled and data-driven strategies, and a value creation mindset to their deals teams—all the way from deal hypotheses to close and post-deal realisation.

Sustainable investing is gaining greater prominence, with funds focusing more on incorporating sustainability into investment strategies. In PwC’s Global Private Equity Responsible Investment Survey 2023, 70% of respondents ranked value creation as a top three driver for their environmental, social and governance (ESG) activities. However, there remains a broad acknowledgement among the investor community that progress in sustainability still needs to be made across the spectrum of private capital asset classes.

Consolidation and specialisation among GPs

We continue to see a trend towards increased specialisation within funds—either with specialised strategies or with market focus. As the higher cost of capital intensifies the focus on value creation, we expect this trend towards greater specialisation will only grow. Larger funds will likely benefit more, although smaller players that can specialise within their niche will gain an advantage. We are already seeing some consolidation and expect to see more as players struggle to differentiate themselves.

The trend towards consolidation among GPs is also being accelerated by a trend in which LP commitments are coalescing around a smaller number of larger managers. When LPs place greater value on fund performance and existing relationships, the more established players will tend to benefit, and new entrants will find it harder to compete. However, we still see a role for established mid-market GPs which can present an interesting proposition to LPs, enabling them to diversify allocations across large and mid-market positions.

We expect to see an increase in GP stakes deals—where GPs use LP-raised capital to buy interest in another GP—in 2024. For GPs selling stakes, these deals help them find partners who can bring additional capabilities to their firm, provide an injection of capital and solve succession planning needs. The GP staking firms (i.e. those funds doing the investing) in turn benefit from gaining an interest in the other fund’s returns and balance sheets. While most GP stakes investing is primarily focused on PE, these GP stakes funds are also looking to diversify their portfolios, both geographically and by type of alternative capital manager.

Regulatory environment and compliance

Private capital firms are facing growing regulatory pressures, in particular around anti-competitive behaviours. Private equity has greater reason to proceed cautiously with investing strategies due to greater scrutiny from regulators in the US, the EU and other jurisdictions. For example, the US Federal Trade Commission (FTC) and Department of Justice (DOJ) have signalled their intent to enhance antitrust enforcement with respect to certain private equity activities, particularly those related to rollup transactions and where dealmaking may lead to unfair competition. Recent concerns raised by the US Financial Stability Oversight Council about private equity involvement in the insurance sector, and whether it could play into systemic risks to the broader economy, may also result in increased regulatory scrutiny for private capital firms.

Additionally, a wave of ESG regulations are taking effect, including the EU’s Corporate Sustainability Reporting Directive (CSRD). Those regulations, along with updates to the Alternative Investment Fund Managers Directive (AIFMD) in Europe and persistent challenges related to cybersecurity, data protection, anti-money laundering and know-your-client checks, are causing many fund managers to reassess their approach to compliance, particularly in the context of dealmaking.

The CSRD modernises and strengthens the rules concerning the social and environmental information that companies must report. A broader set of companies will now be required to report on sustainability. CSRD provides companies with greater insights into sustainability performance and the ability to steer and make data-driven decisions on cost optimisation and efficiency. We expect this will afford those companies a competitive edge and lead to value creation opportunities. As investors increasingly expect private equity and sovereign wealth fund firms to integrate sustainability into their investment strategies, they increasingly recognise the impact of sustainability not just on themselves but also on their portfolio companies.

The introduction of the Pillar Two tax framework means that certain multinational enterprises will be subject to a global minimum effective tax rate of 15%, regardless of the jurisdiction they operate in. It is reshaping the foundations for private capital clients from both a compliance and deal modelling perspective. The impacts are far-reaching and require private capital players to take a proactive stance to be successful. With the globalisation of tax through new regulations, scarcity of skilled people and complexity of tax reporting, the demand for tax data centralisation, digitalisation and cloud transformation is on the rise. 

Additional regulations and compliance add complexity to owning assets and may also be a strain on companies’ existing technology infrastructure and systems. Together with the need to create a compliance function which can meet new reporting requirements, this is likely to add additional costs, either for the funds themselves or the companies they invest in.

Spotlight on sovereign wealth funds

Sovereign wealth funds (SWFs) are entering a new era where they are looking for higher reward, higher risk investing opportunities and as a result are increasing their allocations to private markets. In 2022, buyout activity by SWFs more than doubled compared to 2020 levels. Although buyout activity has dropped back to 2020 levels in 2023, we believe this is due to the challenging M&A environment, not a sign of a shift in strategy away from alternatives.

In 2024, we expect SWFs will continue to strategically deploy their capital across more diverse asset classes and focus on building out and scaling their sector expertise, geographic presence and operational capabilities—using data and analytics to better inform investment and portfolio allocation decisions.

SWFs will likely continue to build out more direct investment capabilities. However, the transition from a more passive investment strategy—such as investing in the secondary market or as a LP—to a more active one requires different expertise and capabilities, which many SWFs do not currently possess. Doing more co-investments, in which the SWF invests alongside a PE partner, and a greater number of direct investments, in which the SWF is effectively competing against PE, will require a balance of collaboration and cooperation between SWFs and PEs. It remains to be seen whether other SWFs will follow one Middle East-based fund which has established investment vehicles in a typical GP/LP model to allow fundraising and management of capital on behalf of other investors. This would be new territory for SWFs.

2024 outlook by private capital asset class

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PE buyout activity decreased from a record high of almost 11,000 deals in 2021 to just over 8,000 in 2023, a 27% decline over two years, due to macroeconomic factors and financing constraints. In 2024 there is greater optimism that PE buyout activity will pick up for the following reasons:

  • Greater stability returning to debt markets will create a more favourable borrowing environment for dealmaking.

  • Sellers are increasingly motivated to sell because the IPO market remains largely inaccessible as an exit route, and lower buyout activity in the past two years has increased the number of companies looking for a buyer.

  • Corporate portfolio reviews will lead to carve-outs and divestitures of non-core assets and create buying opportunities for PE.

  • The valuation gap which had been a factor in many stalled deals in 2023 appears to be narrowing. 

  • Opportunities remain for public-to-private deals. We expect to see further take-privates, which took off in 2022 as global stock markets corrected, although the recent upward trend in stock values may mean fewer attractive opportunities are available.

  • PEs have a greater appetite for taking a platform approach and undertaking a series of acquisitions.

  • PE funds have increasingly shifted their strategies from trying to perfectly time the market to a through-cycle M&A approach—investing and exiting throughout highs and lows of a business cycle—to mitigate risk.

PE exits fell by 43% between 2021 and 2023, an even greater drop than the decline in buyout activity. This has created a buildup of portfolio companies which will need to exit in the not-so-distant future. 

Private equity firms tend to hold investments on average for four to five years. Many of the buyouts made during the pandemic surge are now approaching that exit time frame, and we expect many PEs will start to prepare to bring them to market in 2024. However, with the concern that the high multiples paid to acquire some of these assets in the peak M&A years will result in poor returns for investors, others may remain reluctant to sell.

PE funds will continue to look at their portfolios to determine the best course of action—whether to exit an investment at an acceptable return or hold onto an asset for longer when there is a clear plan which can be implemented to drive greater value and create a better future return. 

Volatility in public and private markets remains a concern for both GPs and LPs in making investment and exit decisions, and the slowdown in dealmaking has brought liquidity to the forefront, prompting creative structuring and financing solutions to supplement traditional exit routes such as the following:

  • Continuation vehicles: The use of continuation vehicles—a structure in which GPs transfer assets from a fund that is at the end of its term into a new fund—allows GPs to retain and reinvest in quality assets with growth potential, while providing LPs with the flexibility to cash out or take an equivalent (or lower) ownership interest in the newly created fund.

  • Minority sales: The sale of a minority stake to another party allows a fund to make a partial distribution while retaining some of the future potential upside. These minority sales have also been popular because they can potentially be structured to avoid triggering a change-in-control clause and to keep existing debt finance in place.

  • Structured capital raise: A structured capital raise, which can take the form of financing a specific asset using a financial instrument or financing the entire business using a nonstandard instrument (structured equity, convertible bond, etc.) can be a lower-cost, custom-fit solution to the company’s capital needs. It may also offer appealing risk/return dynamics in a buyer-friendly market.

  • Net asset value (NAV) financing and preferred equity: These offer GPs a way to bring cash into portfolio companies and also provide limited-partner investors a means of realising some cash from their investments, but without triggering a ‘fire sale’ or forgoing all ordinary equity future upside. GPs are increasingly turning to net asset value (NAV) financing and preferred equity as a way to meet a variety of needs and objectives, the most common being to inject liquidity into existing portfolio companies, make add-on acquisitions or enable distributions back to LPs.

The combination of geopolitical turmoil, sinking valuations, inflation and rising interest rates which set back private markets of all kinds during 2023 probably had the most severe impact on the venture capital sector because of the sector’s higher risk-reward ratio. Not only did venture capital (VC) investment decline in 2023 compared to 2022; there was also a 60% decline in fundraising. But there are glimmers of hope for areas such as climate tech investment. While overall VC investment was down in 2023, climate tech’s share of private market equity and grant investment has increased, tracking at an annual rate of 10% in 2023, extending a decade-long upward trajectory from less than 2% in 2014.

With interest rates expected to remain high in the near to medium term and VCs likely to remain cautious, start-ups in need of liquidity in 2024 may struggle. We expect some may be able to secure new funding or bridge funding, but others with a longer pathway to liquidity may find a sale is the best option.

While the real estate industry remains in a state of transition to a higher cost of capital environment, with recent progress made on inflation and the likely reduction in interest rates globally, the business climate in which real estate dealmakers are operating has just become more favourable. We expect this will boost investor confidence and lead to a revival in real estate transaction activity in 2024.

Medium- to long-term megatrends—such as demographic shifts, housing affordability, decarbonisation and digitalisation—are all important factors for real estate investors to consider as they construct, or rebalance, their real estate portfolios. For example, the shift toward an aging global population is helping drive demand for healthcare-related real estate, while digitalisation trends—including growth in artificial intelligence (AI) and an increased need for data usage and storage—are driving greater demand globally for data centres.

Infrastructure provides consistent cash flows often extending over many decades, making it an attractive asset class. Infrastructure, particularly energy infrastructure, remains a bright spot for investment activity in 2024 as investors are placing bets on the importance of the energy transition to society achieving its net zero goals. We expect infrastructure will continue expanding as an asset class, creating investment opportunities, particularly in infrastructure development. This includes areas such as energy storage, the electrification of transportation, alternative fuels for aviation and marine industries, and digital infrastructure such as data centres (as noted above).

Capital continues to flow into infrastructure, aided by government regulation in many countries whether through tax incentives, government-backed pools of capital, policy changes to enhance investment or government intervention in specific projects. The US Inflation Reduction Act (IRA), passed into law in 2022, and other legislation, such as the European Union’s Green Deal Industrial Plan, aim to increase investment in low-carbon infrastructure projects. This increasing capital will continue to drive investors into newer sectors, such as healthcare, where the characteristics of infrastructure may not initially seem to, but do in fact, exist.

The structural changes in public financing markets have allowed private credit to outperform other asset classes in terms of growth—with dry powder growing at a 15% CAGR over the past 10 years and AUM growing at a 14% CAGR over the same period. This growth has solidified private credit’s position as a well-established asset class, suitable for long-term investors.

The evolution of the private credit market is resulting in a broader range of options for companies seeking capital. Borrowers are increasingly turning to flexible capital and customised funding solutions, often adopting an approach that combines both private and public funding sources. Private credit is playing an ever-increasing role in providing financing for deals and—with global dry powder of US$450bn at the end of December 2023—they are in a strong position to support an increased level of dealmaking activity in 2024.

As private capital players seek to expand into new asset classes and bring more AUM under their control, the insurance industry has become a key area of focus for investors. We expect further investment in insurance companies by private capital players who are attracted to the opportunities presented by the long-term capital to manage. This capital can be invested in private credit strategies in which they have strong origination capabilities. Life and annuity insurers and reinsurers offer these characteristics. They can also provide the opportunity to spread income across various lines of business based on the difference between what is earned on investments and the return required to be paid on the underlying policies. Typically, on acquisition, the AUM will be transitioned from lower-yielding assets into private credit strategies that offer higher yields, subject to insurance regulations.

Private equity buyout deals, 2014-2023

Bar chart showing M&A volumes and values. Deal volumes and values declined in 2022, resetting to pre-pandemic levels following a record-breaking year in 2021.

Source: Preqin

Note: Other Private Equity includes growth, balanced, fund of funds, secondaries and others
Source: Preqin

2024 M&A outlook for private capital

With the uncertainty around interest rates and inflation now seemingly in the rear view mirror, we expect to see a rebound in M&A activity in 2024. Whilst the exact timing remains uncertain and will vary by sector, private capital players are poised to take advantage of a more stable economic environment. The record levels of dry powder, a backlog of portfolio companies, and continued demand from investors of all types, will fuel dealmaking in 2024 and the years ahead.

We have based our commentary on private capital trends on data provided by industry-recognised sources. Specifically, private capital dry powder, private capital fundraising data and private equity buyout data is based on information provided by Preqin, as of 31 December 2023, as accessed on 5 January 2024. Global private equity exit activity is based on information provided by PitchBook, as of 31 December 2023, as accessed on 11 January 2024. Assets under management (AUM) data is also sourced from Preqin based on its Future of Alternatives report dated 17 October 2023. This has been supplemented by our own independent research.

Eric Janson is PwC’s global private equity, real assets and sovereign funds leader. He is a partner with PwC US. Tarek Shoukri is a director with PwC US. Mairi McInnes is a director with PwC UK.

The authors would like to thank the following colleagues for their contributions: Tim Bodner, David Brown, Kevin Desai, Hugh Lloyd Ellis, Rob McCeney, Steve Roberts, Richard Rollinshaw and Samiye Yildirim.

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