Privatization rates are down by 50% by 2024

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Private equity funds posted only half the value of the investments they sold in 2024, the third year in a row that payouts to investors have fallen due to the drought.

Investment houses typically sell 20 percent of their investments each year, but industry executives predict that earnings for the year will be half that number.

Cambridge Associates, a leading adviser to large institutions on their private equity investments, has estimated that funds have fallen by around $400bn in payouts to their investors over the past three years compared to the historical average. .

The data highlights increasing pressure on firms to find ways to return money to investors, including more exits next year.

Companies have been struggling to make deals at attractive prices since the start of 2022, as rising interest rates pushed down financing costs and reduced business prices.

Traders and their advisers expect the merger and acquisition process to accelerate in 2025, which is an opportunity to help the industry work with what the expert Bain & Co. what it called a “major undertaking” of $3tn in aging contracts that must be sold in the coming years.

Several major public offerings this year including food transportation giant Lineage Logistics, aviation equipment specialist Standard Aero and dermatology group Galderma have given private equity managers the confidence to take companies public, while the election of Donald Trump increased the excitement of Wall Street.

But Andrea Auerbach, global head of private equity at Cambridge Associates, warned that the industry news could take years to work out.

“There is an expectation that the wheels of the export market will start to change. But it will not end in one year, it will take several years,” said Auerbach.

Private equity firms have used new strategies to return money to investors as sales prove difficult.

They used a growing number of so-called continuation funds – where one fund sells a stake in one or more companies to another fund that the firm manages – from engineering .

Jefferies predicts there will be $58bn of development fund deals by 2024, representing a record 14 per cent of all private deals. Such funds made up just 5 percent of all outflows in 2021, Jeffries found.

But some private investors have doubts that the industry will be able to sell the goods at prices close to the current financial values.

“You have a lot of money invested in ideas that don’t work,” a senior industry insider told the Financial Times.

They warned that a record $1tn-plus of purchases were made in 2021, shortly before interest rates rise, and many deals are being made on the books of firms with highly optimistic valuations.

Goldman Sachs recently noted in a report that private equity sales, which historically were made at a premium of at least 10 percent to internal valuations, have in recent years been made at discounts of 10-15% .

“(Private) equity in general remains overvalued, leading to this situation where assets remain stagnant,” said Michael Brandmeyer of Goldman Sachs Asset Management in a report.