The state of private equity: A look back at Q1 2024

As Bain & Company’s Global PE outlook for 2024 begins, “Getting unstuck is job one.” While Q1 showed some glimmers of light—including Leonard Green’s sale of SRS as the 4th most valuable U.S. PE exit in history—Pitchbook's recent report shows that full recovery will likely require more time and work.

Here’s what else the latest numbers say about the state of private equity.

In Q1 2024, PE fundraising was a tale of two realities. In general, established funds did well as institutional LPs concentrated their PE exposure with the larger, less volatile vehicles.

If the trendline persists, Q1’s $76.8 billion would position 2024’s fundraising total as an exact match to 2023’s, with the two years being tied as the second-highest total in history. Much of that money went to three megafunds (BDT & Company, TPG, and TJC), which closed on a combined $32.9 billion, or 42.8% of the quarter’s total. Middle-market funds ($100 million to $5 billion) raised $43.5 billion, 56.7% of the PE total, substantially less than their five-year quarterly average of 62.9%.

Although there is money coming in, it’s coming more slowly. The time to close a fund has jumped to 16.8 months, up from 14.5 months in 2023 and a mere 11 months in 2022. Not even megafunds are immune: Among the 10 largest open funds, nine entered the market before 2023.

Expectedly, given the preference of LPs for larger funds, the number of vehicles closing has dropped substantially, with only 63 funds closing in Q1. If this trend persists, 2024’s total would be a staggeringly low 252 funds closed, something not seen in the past decade.

Buyout funds made up 90.3% of all funds raised in Q1. The proportion of growth equity funds plummeted by more than half, to 9.7% of the total, from 2023’s level of 20.2%. Simultaneously, growth equity deals are soaring since they involve little leverage and smaller check sizes. Greater exit momentum in that part of the market may help restart its fundraising.

With the slow deal activity, dry powder continued to grow, reaching $992.9 billion. Almost $800 billion of this was raised between 2021 and 2023.

With cash constraints hampering institutional LPs, PE firms are looking for capital from atypical LPs, most notably the retail market. Although individual investors own approximately half of the roughly $285 trillion of global assets under management (AUM), they have only 16% of alternative assets. Global behemoths such as Blackstone, KKR, and Carlyle have already released or are planning products to tap that market.

Contrary to the optimism created by Q4 2023’s small bounce in exit value, exit activity in Q1 2024 dropped. The $66.7 billion generated by 316 exits was a 19% decline compared to the prior quarter, and the count, a gain of 0.9%, was essentially flat. Moreover, the decline would have been a collapse if not for a single deal at the quarter’s end, Leonard Green’s sale of SRS to Home Depot, which contributed $18.3 billion (27.4%) to the total. An anomalously large exit is still an exit and testifies to the value created during a private equity hold. But Q1’s results fundamentally show PE continuing to seek a bottom. Even with the SRS transaction, Q1’s exit value still lags the 2017-2019 average by 22.7%.

As discussed in our Q4 2023 wrap-up, PE portfolio companies are backing up like cars after the eclipse. The median holding period for 2023 exits was 6.4 years, the longest since 2015. Companies currently in PE portfolios are also getting older, reaching a 4.1-year median that is higher than the median level over the past five years. These numbers will likely rise as the backlog of companies acquired during the frenzy of 2021 and 2022 moves through the PE system.

Public listings showed slight signs of life in Q1 2024 with four exits. Only one, however, was a real IPO; the other three were reverse mergers. Trade sales (exits to corporates) also showed mixed results. At $44.9 billion, they made up 68.9% of the total PE exit value, a small drop of 2.2% from last quarter, while the 133 estimated transactions accounted for 47.7% of the total deals—a more abrupt fall of 21.9%. Compared to pre-pandemic levels, though, trade sales are starting to recover, showing two consecutive quarters of growth.

The nascent recovery of trade sales stems from two advantages that corporates enjoy. First, they can use bonds to finance their deals. Second, they are facing less competition from PE firms, who are dealing with their own glutted portfolios and demands from LPs to engineer their own exits rather than sell “trophy assets to a competitor just to watch them generate returns for someone else.”

This second trend appears in the sponsor-to-sponsor (secondary buyouts) data for Q1 2024, where activity reached a new 10-year low (excluding Q2 2022). The 148 deals generated a total of $20.3 billion, 30.4% of the total PE exit value and substantially below the past two year’s quarterly average of 46.3%. Compounding the above-mentioned issues is the ongoing mismatch of bid and ask prices.

In short, exits are in a holding pattern. The long-awaited interest rate cuts are still being awaited. Eventually, they should make debt more affordable, restarting the PE cycle. But in the interim, the adage reverberates: “Without exits, private equity is charity.”

Quarterly deal numbers seem to have stabilized. Q1’s deal count—2,105—is roughly in line with the past three quarters, while deal value dropped to $145.4 billion. If Q1 activity were extrapolated across the full year, deal counts would rank as the third highest in a decade, while value would be the lowest since 2017.

Due to their reliance on high-priced leverage, platform deals fell slightly to 19.0% of Q1’s total count. Because they don’t need leverage, growth equity activity remains strong, accounting for 21.6% of Q1’s PE deal count, considerably above its five-year average of 18.6%—and extending the year-long trend of outnumbering platform deals. Growth equity’s share of deal value was 12.9% of the total, dramatically above the 10.4% five-year average but inevitably below the value of platform deals.

Take-private activity crashed in Q1 2024, down 50% from last quarter and 75% year-on-year for two reasons—first, the same financing cost issues that derailed platform deals, and second, the public market run-up, which made public companies prohibitively expensive. Momentum may build if interest rates fall in the latter half of 2024, but currently, these pressures have resulted in a decline in activity over four consecutive quarters. Most of the 19 transactions that did occur were less than $1 billion.

Remarkably, bank-led refinancing activity soared in Q1, clocking in at $51 billion as PE borrowers tried to reduce borrowing costs. This is over twice the $23.4 billion of sponsor-led M&A deals (platform LBOs and add-ons). Typically, the ratio is reversed, with refi lending only about 25% of M&A loans.

In Q1, add-ons grew to represent 75.9% of all PE buyouts, up by half a percentage point from the 2023 average. This performance reflects the ongoing interest in smaller, easily financed deals to build a powerhouse company. In keeping with add-on activity, carveouts—often viewed favorably as fodder for platform growth—now make up 12.6% of total PE activity, the highest share since Q2 2016.

Valuation metrics have spent the past two years falling as dealmakers try to find a bottom. Q1, though, saw just the faintest glimmer of a recovery. U.S. EV/EBITDA multiples rose roughly 10% from 2023 (based on disclosed deals) on a trailing twelve-month (TTM) basis to 11.9x, up from 10.6x in 2023. The EV/revenue multiple climbed to 2.1x from its 2.0x level at the end of 2023. Debt and leverage multiples are also showing either decelerating declines or even small recoveries: Debt/EBITDA rose to 5.1x for Q1 from 4.9x in 2023, while debt/EV ratios were basically flat at 45.1%, from 2023’s 45.7%. Both metrics, though, were dramatically lower than the 10-year average: 5.6x for Debt/EBITDA and 55.0% for Debt/EV.

The good news in Q1 2024 has been that the rate of decline has slowed. But to reverse it, the industry needs to create more value in its companies and develop new approaches to generating liquidity. In Bain’s words, it needs to get unstuck.

Academic research has shown that PE firms must create value in times of high-interest rates rather than relying on the easier route of “riding the multiple.” In difficult times, PE firms support their companies in expanding their market share by acquiring competitors—but success requires active intervention. None of this is easy, but it’s how PE earns its fees.

PE existed and thrived in an era of non-negative interest rates. It needs to reorient itself to succeed in the current environment because it’s clear that the days of zero interest will not return anytime soon.