Private equity: US Deals 2024 outlook

Private equity: adjusting to a new normal

In 2023, private equity (PE) activity remained sharply down from its pandemic peak, reflecting stubbornly high inflation and correspondingly elevated interest rates and capital costs. Despite sitting on unprecedented capital, investors remained cautious, awaiting reductions in asset valuations to reflect cooler demand and tighter financing. Vendors, for their part, are willing to wait for the right suitor, extending hold periods to maximize exit value.

We expect many of these factors to persist in 2024. In this context, value creation (both driving growth and expanding margins) will remain critical, both to justify cost-of-entry for new investors, and to achieve target internal rate of returns (IRRs) for owners on high-priced deals made during the frothy pandemic market. In addition, we see cash management and creative deal structuring coming into ever sharper focus, as elevated interest rates and costly credit become the new normal.

Putting this together, we see three key trends which will define private equity for 2024 and beyond:

  1. A blurring of the lines between investor and operator: The critical need to drive value creation – both top line and bottom line – will take many PEs beyond their traditional comfort zone, forcing a more hands-on approach with a corresponding need for greater operating capacity and capability.
  2. A relentless focus on cash and profitability: While continuing to drive growth, management teams will need to have an ever-closer eye on cash and operations, requiring CEOs to deliver margin expansion whilst continuing to drive growth, and further elevating the CFO role.
  3. An increased need for creativity and flexibility in dealmaking: With credit continuing to be expensive, investors will need to be creative, focusing on smaller deals or minority investments, and potentially increasing equity checks.

Key deal drivers

Capital allocation and carve-outs

Rising costs coupled with lackluster earnings are continuing to force corporates — both public and private — to reconsider the strategic fit of their portfolios. 

For private equity, this landscape offers continued opportunity. Following a strong year of carve-out activity in 2023 — particularly among diversified industrials, life sciences and technology players — we expect a continuation in 2024. To be successful, however, carve-out investors will need to bring value creation to the fore. In particular, opportunities to maximize performance through data and analytics, AI and talent will be critical sources of value.

PE will also have opportunities on the other side of the table. While platform-building will remain a critical strategy for funds, there will also be chances to streamline portfolio companies, spinning off or carving out components of the portfolio which are not strategically core.

To enable delivery — both on the buy side and sell side — investors will need to further develop their own operational capabilities. Those able to bring to bear the deepest operational expertise will be primed for success, both in identifying the right deals and driving future performance.

Megatrends offering opportunity amid uncertainty

Despite continued macroeconomic challenges, we expect certain industry niches to see more robust opportunity, reflecting their close nexus with macro tailwinds. Businesses with solutions that address megatrends such as automation, AI, onshoring, climate change, labor tightness and demographic shifts will remain attractive, and likely see stronger levels of deal activity (and corresponding competition). 

However, even these businesses will be subject to uncertainty and individual risks. Understanding the ability of these businesses (and sectors) to deliver continued organic growth — without necessary reliance on bolt-on M&A — will be key should elevated rates and credit costs continue to restrict inorganic opportunities.

To support this, we expect an increased focus on building an integrated, holistic asset perspective, from initial diligence to post-deal value creation. Maximizing opportunities — and avoiding over-priced assets — will require a combined view on: 

  • How an asset’s market positioning is supported by its product and service portfolio
  • Where there are opportunities to drive sustained organic growth
  • How its cost base can optimally support that positioning
  • How talent considerations will impact performance 
  • How all these factors will together drive financial performance.

Investors who can bring together these perspectives will be best placed to succeed.

Innovation in dealmaking needed for growth and sustainability

As we enter 2024, it is increasingly clear that the investment dynamics of the last 18 months —  inflation, expensive credit and correspondingly slow deal flow — are here to stay, at least for the medium term. As dealmakers adjust to this new reality, we expect continued shifts in how deals get done.

Faced with a challenging credit environment, we see pockets of opportunity for innovative investors:

  • Growth deals: Even the largest investors are struggling to finance mega acquisitions at viable rates. Smaller deals, though, continue to offer opportunity. Investors able to capitalize on these opportunities, from sourcing through execution and value creation, will be well positioned.
  • Minority stakes: Taking non-ownership stakes in targets allows for capital deployment with lower (or even no) requirements for new lending. Investors able to flex their criteria will have access to opportunities not actionable through traditional buy-out approaches.
  • Increased equity checks: With historically high levels of dry powder, but more limited access to affordable credit, we expect an increase in equity check size, and potentially even “all-cash” deals — provided investors can get comfortable with asset quality and value creation opportunities.

Pursuing some of these strategies will allow for continued dealmaking but will also challenge traditional models and capabilities developed for buy-out structures.

“This dealmaking environment is a new normal, and we see opportunities for those able to capitalize by combining innovative dealmaking and a growth mindset with a relentless focus on operational excellence and value creation.”

— Kevin Desai, US Private Equity Leader
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