The state of private equity: A look back at Q4 2023

Pitchbook started its report on PE in 2023 with the disheartening comment that “the $3.0 trillion U.S. P.E. industry just trudged through its worst year in combined deal activity since 2016.” Exits plummeted to the lowest level in over a decade. PE investment levels fell 29.5% YoY, and the value generated by exits dropped by 26.4%. The new year marks the start of the third consecutive year of declines in PE dealmaking.

Has private equity finally hit the rock bottom it spent all of 2023 waiting for? Here’s what the latest numbers say.

Fundraising, the one bright spot this year, reached $374.8 billion, barely 2% less than 2022’s record. Even so, this achievement was a hard slog as the median time to close a fund lept to 14.1 months, the longest since 2011 and nearly 30% longer than 2022’s metric. Yet by extending closings, 81.3% of GPs raised larger funds, with the median step-up of 50% on track with the five-year average.

One notable figure for 2023 was the number of megafunds that closed—$374.8 billion was allocated across 381 vehicles, compared to 2022’s $379.2 billion over 779 funds. 2023 saw 17 of these behemoths ($5 billion or more) close on a combined $191.4 billion, a new record.

Middle-market funds ($100 million to $5 billion) produced a strong 2023, closing on $180.6 billion across 205 funds and accounting for 59.4% of total fundraising, well above the 10-year average of 46.7%.

Interestingly, growth equity funds had their lunch eaten from a fundraising perspective, as their share fell to 19.4% of the total mix, the sector’s second consecutive annual decline in count and value. It appears that the shift away from the “growth at all cost” mentality has reduced interest in growth equity—even as that space has been more active due to its all-equity deals that don’t rely on finding debt that is now scarcer and more expensive.

Thanks to fundraising activity and low deployments, dry powder reached a new record of $955.7 billion, up 9.3% in the past two years. At some point, that dry powder will need to be put to work.

Each time PE observers thought exits might have hit bottom, the industry slumped a little more. Q4 2023 clocked in with the weakest activity all year, as 256 companies exited, generating $44.7 billion. Median hold times for exited investments hit 6.4 years, a new record. The cumulative hold period for companies in PE portfolios rose to 4.2 years, the highest level since 2012. Ultimately, the total exit count for 2023 is lower than any year since 2013.

Over the year, public listings generated only $6.8 billion, dramatically down from 2021’s peak of $296.5 billion and the pre-pandemic average of $45.1 billion. Only three companies went public in Q4, and while a “growing pipeline” of companies is waiting to list, Goldman Sachs and others don’t expect a solid recovery until the second half of 2024.

Sponsor-to-sponsor exits (so-called secondary buyouts) fell yet again in 2023. This year, the 503 secondary buyouts produced $116.3 billion, almost half the total U.S. exit value. Q4’s 88 secondary transactions generated $19.5 billion, showing a second consecutive quarter of decline. The explanation remains the same: despite record amounts of dry powder, buyers won’t pay what sellers ask. Moreover, scarcity of leverage prevents most of the larger sponsor-to-sponsor transactions.

In short, exits are in a holding pattern. The long-awaited interest rate cuts will likely free up activity as debt becomes more affordable, but should this not occur, sellers may be forced to reduce their price expectations. And, of course, until exits return, LPs will have fewer dollars to allocate to upcoming fundraises.

As noted in our Q2 analysis, these longer hold times threaten a “maturity wall” as funds hit the ends of their five- to seven-year lives. GPs are trying to add value to boost a company’s exit value and create continuation funds and GP- and LP-led secondaries to house promising companies. Continuation funds offer liquidity to LPs who choose to sell into the vehicle but have raised issues about conflicts of interest and the true arms-length nature of the pricing. Managers have started raising dedicated continuation funds—Blackstone raised $2.7 billion for its first, while later in the year, Alpine raised a $3.4 billion single-asset vehicle.

The classic LP liquidity option has been to sell a fund position into a secondary fund. In the past two years, however, the global volume of secondary transactions has steadily fallen, first by 18% in 2022 and then a further 25% in the first half of 2023 to $43 billion. These figures reflect the same trend that has hobbled the broader exit market: disagreement between buyers and sellers on asset values. As of mid-year 2023, the discount on secondary sales had recovered from its nadir (since 2017) of 84% in 2022 to 90%—tied with 2020 as the second-lowest reading of the past decade.

Perhaps looking to pounce on such high discount levels, PE managers have recently raised significant capital for their own dedicated secondaries funds. In 2023, Blackstone closed on $22.2 billion for Strategic Partners IX, the largest PE secondary fund to date, followed by Goldman Sach Asset Management’s $14.2 billion Vintage IX.

In deals, GPs are still trying to decide what’s “fair,” which is how the year started. Q4 2023 deal value fell by 22.6% YoY, although the deal count for the quarter showed a slight uptick from prior quarters. Deal value fell to $645.3 billion for the year, down by 29.5% from 2022. Excluding 2020, this was the lowest value since 2017, and the full-year deal count of 8,115 marked a 7.3% drop from the year before. It’s notable that despite everything, 2023’s deal count still ranks third-highest in the past decade.

Unsurprisingly, platform deals, which need the most leverage, have been hit hardest in the downturn, with values falling 36.5% since 2022 and 51.8% since their 2021 peak. Driven by the same dynamics, growth equity has soared. Its share of deal value gained 2.8 percentage points in 2023, to 12.7% of the total.

Regarding deal value and count, growth equity remained unchanged compared to 2022, while platform buyouts fell by 36.5% and add-ons by 24.6%. Growth equity deals in 2023 outnumbered platform LBOs for the first time. North American and European take-private deal counts (90) remained relatively constant over the past two years. However, pricing pressures compressed the total value to $151.9 billion—the third highest level of the past decade.

The gap between public and private company multiples suggests further contraction in large take-privates. Instead, smaller take-privates (sub-$1 billion) and larger private-only deals are likely to gain favor in 2024.

The slump in platform activity and the boost in growth equity reflect two sizes of the same coin: the leverage lockdown. Leverage ratios have contracted dramatically: bank-funded debt-to-loan ratios fell to 45.7% in 2023, down from 50.8% the year before and the 10-year average of 55.0%. Bank-funded debt//EBITDA came along, falling to an average of 5.0x in 2023 from 5.9x in 2022. And even private credit has fallen off.

U.S. EV/EBITDA multiples fell to 12.3X, down from the peaks of the prior two years but higher than anything previous. The U.S. data came in significantly higher than the figures for North America and Europe, which fell to 10.9x, lower than any year since 2017. The picture reversed for EV/revenue multiples: U.S. PE data came in at 1.7x, matching 2020, but the North American and Europe multiple, at 2.1x, trailed only the past two years.

Even add-ons, smaller deals that are typically easier to finance, have fallen to 39.3% of 2023’s deal value and 59.5% of the deal count. With its limited use of leverage and focus on high-growth, profitable companies, growth equity has done well, as have carveouts. In these, the parent company executes a plan to eliminate non-core business elements. GPs often find these transactions more financeable and like their ability to optimize portfolio company performance. Carveouts comprised 10.7% of U.S. PE buyouts in Q4 2023, above the 10.01% average of 2017-2019.

Ashok Vardhan, co-head of Goldman Sachs’ Global Banking & Markets business, recently commented that “a 25-year economic cycle was crammed into three-and-a-half-years…It’s just been so much for the markets to digest.” Even as the global economy stabilizes in the post-COVID, post-inflationary environment, the pre-COVID normal may be gone forever. Geopolitical tensions, global election uncertainties, labor force constrictions, and the possible continuation of high long-term interest rates seem poised to usher in a new normal with which PE must grapple.

Yet hope always springs eternal, with many in the industry hoping for a rate cut and an exit rebound to get the industry moving again. Smart and resilient as the industry practitioners have been over decades, there is no doubt that they will rise to the challenge. Stay tuned for 2024.