3) Value creation
Strategic and operational improvements will continue to be the largest sources of PE returns. With opportunities for exits currently slower than historical averages, firms will zero in on efforts to create value in portfolio companies on the operations side. The focus will be on finding the sweet spot between cost-cutting and fueling future growth to prepare for anticipated improvements in the exit market.
Private equity’s four- to six-year holding period is the transformation window to pursue value, creatingopportunitiesacross sales, marketing, operations and finance. Using rapid diagnostics and narrowing down to opportunities that will drive EBITDA will provide clarity around top-line, bottom-line and capital efficiencies. This means that firms will need to understand the true cost drivers of the business and take appropriate action. Third-party spend, pricing and promotions, and tax savings will be prime areas of focus in 2024.
4) Working capital
EY research suggests that most portfolio companies continue to have enormous opportunities to improve in many areas of working capital, especially as optimizing operational value during extended hold periods takes on increasing importance. In the recent PE pulse survey, 80% of the PE professionals surveyed indicated that they were paying more attention than usual to helping companies improve their visibility into cash and liquidity needs.
To manage working capital more effectively, many PE-owned businesses have followed typical cash improvement methods, such as extending supplier terms, running down old stock or factoring some of the debtor book. Right sizing an IT organization and “lease vs. buy” technology options are two additional examples.
While these tactics can help, more firms are also considering adopting holistic tools that enable firms to optimize working capital and cut costs without reducing their capacity to drive top-line growth. Tools and processes that help organizations sharpen cash forecasting – knowing what’s needed where and when and include cash pooling and repatriation measures – can help optimize the use of existing cash within the business. This also provides increased optionality for management teams and sponsors.
5) Retail market expansion
Private equity firms will continue to experiment and develop expanded opportunities via the retail channel. Retail investors have the same attraction to PE as professional investors: asset class resilience, asset allocation diversification and exceptional performance vs. public markets.
To that end, more than 150 private equity firms have already invested in registered investment advisor (RIA) portfolio companies; nearly 30% of them offer crossover opportunities with at least five other wealth service portfolio companies. For many firms, retail inflows represent their fastest-growing source of new funds, leading them to develop new targeting methods for these investors. Moreover, an ever-increasing number of third-party platforms are providing new distribution channels.
In addition, with their existing M&A and investment models, most private equity firms are well positioned to offer wealth management services to retail investors. Some may even consider offering white-glove service as part of a holistic wealth management strategy, creating a true first-mover advantage.
Private equity has grown rapidly over the past 10 years and the current slowdown in deal activity, albeit brief, offers firms an excellent opportunity to leverage new technology – highlighted by AI and GenAI – and to deploy other operational efficiencies that will drive value creation and transformation in their portfolio companies. The firms that take this step will be poised to fully take advantage of new opportunities when deal activity and the IPO market rebounds.
FAQs
According to data collected by Preqin, April 2024 marks the first time since December 2014 that dry powder declined across the private equity industry. Granted, you may need to squint to notice the difference because the current mark is $3.911 trillion, which is only $400 million less than the level at the end of 2023.
How much dry powder in private equity 2024? ›
According to data collected by Preqin, April 2024 marks the first time since December 2014 that dry powder declined across the private equity industry. Granted, you may need to squint to notice the difference because the current mark is $3.911 trillion, which is only $400 million less than the level at the end of 2023.
What is the outlook for alternative investments in 2024? ›
What's the outlook for alternative investments? Private equity funds with an older vintage — the year in which they first drew down capital — might continue to struggle in a high-interest environment. Private credit spreads will likely narrow in 2024 as competition increases and sponsors demand more attractive terms.
What is happening to private equity? ›
Private equity aggregate exit value of $234.1 billion in 2023 was down 23.5 percent from $306.0 billion in 2022, and down 72.0 percent from $836.1 billion in 20211.
Are PE firms doing well? ›
Despite the drop in aggregate fundraising, PE assets under management increased 8 percent to $8.2 trillion. Only a small part of this growth was performance driven: PE funds produced a net IRR of just 2.5 percent through September 30, 2023. Buyouts and growth equity generated positive returns, while VC lost money.
What is the trend in private equity in 2024? ›
Private equity firms will focus on five key trends in 2024. Deploying artificial intelligence will lead the way, followed by investment in infrastructure particularly related to energy projects. Value creation will also be a priority as firms seek to improve strategic and operational efficiency.
What does Blackstone predict for 2024? ›
We believe that 2024 could mark the end of the COVID-era recovery, with the U.S. economy emerging from a liquidity trap, a pivotal shift that not only redefines our current economic understanding but also alters our future expectations.
What is the outlook for private equity and venture capital in 2024? ›
Mid-tier and smaller private equity (PE) firms are more optimistic for the deal activity to pick up in 2024 compared to their larger peers. 61% of limited partners (LPs) investing in private markets reported they will increase their asset allocation to private credit in 2024.
Is private equity slowing down? ›
Private-equity deal activity dropped roughly 40% to $846 billion globally in 2023 from $1.44 trillion in 2022, which was already significantly down from the prior year, according to Dealogic. The measures include purchases and sales as well as acquisitions made by private-equity-owned companies.
What are the challenges of private equity? ›
Slow economic growth, labor issues, high interest rates, inflation, geopolitical tensions, potential recessionary pressures, and instability could all dampen fundraising and exit opportunities. Despite the slowdown in 2023, private equity firms remain optimistic.
Private equity titan Blackstone is the top in the United States and the world, raising $125.6 billion in capital from 2018 to 2023. Headquartered in New York, Blackstone's total assets under management stood at $991 billion as of the first quarter of 2023, and have since surpassed $1 trillion this year.
How much does a VP in private equity make? ›
Vice President Private Equity Salary
| Annual Salary | Monthly Pay |
|---|
| Top Earners | $244,500 | $20,375 |
| 75th Percentile | $190,000 | $15,833 |
| Average | $157,532 | $13,127 |
| 25th Percentile | $115,000 | $9,583 |
Private Equity Salary, Bonus, and Carried Interest Levels: The Full Guide
| Position Title | Typical Age Range | Base Salary + Bonus (USD) |
|---|
| Associate | 24-28 | $150-$300K |
| Senior Associate | 26-32 | $250-$400K |
| Vice President (VP) | 30-35 | $350-$500K |
| Director or Principal | 33-39 | $500-$800K |
2 more rowsIn 2023, private equity firms faced significant challenges amidst a static market, soaring inflation, elevated interest rates, and slow deal activity. This confluence of factors resulted in an abundance of dry powder held by private equity firms.
What is the dry powder of PE funds? ›
What is dry powder in finance? For venture capital (VC) and private equity (PE) firms, dry powder refers to the amount of committed, but unallocated capital a firm has on hand. In other words, it's an unspent cash reserve that's waiting to be invested.
What is the record for dry powder in private equity? ›
Dry powder has been increasing worldwide over the past decade and reached record heights in 2023. In 2023, the dry powder of private equity companies reached nearly four trillion U.S. dollars globally, up 400 billion compared to the previous year.
How much dry powder is there in VC? ›
As of the end of Q1 2024, VC funds have accumulated $317 billion of dry powder. This record amount of dry powder is the direct result of record fundraising in 2021 and 2022 and the slowdown in capital deployment over the past several quarters. In fact, about 72% of the dry powder is from 2020-22 vintage funds.
