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Private equity: US Deals 2024 midyear outlook

Creating value for private equity in a complex deals market

Private equity deal activity has remained sluggish so far in 2024, with buyers and sellers continuing to dig in amid mismatched expectations on asset value. Interest rates have remained higher for longer than anticipated, limiting buyer ability to bridge gaps to expected value through cheap debt. On the sell side, owners have held firm on price, reflecting an unwillingness to crystallize losses on assets bought during the frothy pandemic market.

We don’t expect this environment to change in the short term. A near-term reduction in rates seems increasingly unlikely, and a return to the low-rate environment of the last 15 years seems out of the question. Against that backdrop, we expect continued focus on value creation, as investors look for ways to deploy their near all-time high cash stockpile.

Themes to watch include:

  • Bilateral deals. Reports of failed auctions are up, with blame placed on inflated seller expectations. Bilateral deals offer an opportunity to align early on value expectations without the pressure of a competitive situation.
  • Value creation as the core of the thesis. Investors are placing more focus on value creation. Delivering sustainable value will be critical to bridging the value gap.
  • The continued rise of AI. Whether a potential boon or a disruptive risk, understanding AI’s impact has rapidly become a critical facet of every deal. We expect continued focus, as funds realize the potential of AI in value creation.
  • Carve-outs. Carve-outs have been a bright spot among recent slow activity. We expect this to continue, given enhanced opportunities for value creation.

Note: The primary M&A data source used in the midyear outlook is S&P Capital IQ.

How market conditions are impacting M&A strategy

Elevated interest rates and correspondingly costly credit continue to be a significant drag on private equity activity. But this alone does not fully explain the slowdown: in prior periods with similar — or even higher — rates, activity has seen stronger growth. Today, it is likely uncertainty, as much as rates themselves, that is weighing on investment volumes. Uncertainty over future interest rate movements has created a prolonged wait-and-see period, with both buyers and sellers hoping for a return to easier money.

As it becomes increasingly clear that elevated rates are here to stay, investors must bring together innovative dealmaking and a relentless focus on value creation to succeed. We see opportunity for leading funds to develop best-in-class operational capabilities, bringing market-leading capabilities across technology, AI, people and other capabilities to drive returns. Those able to deliver this new model will be best placed to drive deals — today and in the future, regardless of monetary policy.

Looking beyond interest rates

What’s now?

We expect pressure to do deals to continue to build, as limited partners (LPs) become impatient for returns. This will manifest differently across the market. Mega fund-to-fund deals will remain subdued, given significant value divergence and more limited value creation opportunities. More unique megadeals — carve-outs, take-privates, purchases from founders or families — will likely be more prominent, given their greater complexity and resultant opportunity for value capture. Finally, we expect to see opportunity in the midmarket, particularly for investors able to look beyond financial engineering as the driver of return.

We’ll be keeping an eye on the Fed, but beyond that, a truer sign of health will be an increase in deal volume even while rates remain elevated. This would signal a move away from the wait-and-see of the last 18 months, and an increased focus on true organic value creation as the primary driver of deal success.

What’s next?

To navigate the realities of today’s market, PE will have to continue to evolve. Where historically PE firms focused on cost reduction and operational rationalization, and recently, focused on financial engineering enabled by low-cost financing, the PE firm of the future must be laser-focused on business transformation to enable true value creation.

Dealmakers in this environment should focus on a set of key priorities:

  • Upskill in digital and AI. Both at the fund and portco level, make strategic investments in talent and technology to unlock value and prepare for future seismic shifts.
  • Bring together deal and operating teams. Involve operating teams throughout the deal life cycle, leveraging their expertise early and ensuring alignment on critical value creation initiatives that underpin the deal thesis.
  • Use M&A for capability expansion. Deploy add-on M&A thoughtfully, targeting differentiated offerings and capabilities that materially enhance growth or support improved efficiency.

“This new macroeconomic normal will provide real opportunities for those investors willing and able to deliver on organic value creation.”

— Kevin Desai, US Private Equity Leader

The bottom line

Elevated interest rates and challenging deal conditions are here to stay. Success in this environment will come to those best able to identify and capture value, from deal origination through exit.

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