Updated December 20th, 2023 at 11:42 IST

As golden age for private capital ends, 2024 heralds more consolidation

Last month, the company joined Blackstone in a $15 billion offer for online classifieds group Adevinta, Europe's largest leveraged buyout this year.

Reported by: Thomson Reuters
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The last 12 months have been some of the most challenging in the buyout industry's recent history, as private capital fundraising fell to five-year lows and investors became more selective with their money, sector executives and advisers told Reuters.

Those pressures are expected to continue in the new year, forcing private capital groups to sell assets so that they can return cash to investors, known as limited partners (LPs), and in some cases make them takeover target for larger rivals.

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"That will drive some consolidation in the industry and we will also probably see some more exits from portfolio companies, more deal activity in 2024 to show good returns to the LPs," said Anthony Diamandakis, who runs Citi's global asset manager advisory business.

Among asset classes, the fundraising slump hit infrastructure the hardest while private debt continues to be among the most popular strategies, accounting for 16 per cent of all capital raised.

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In terms of deal volumes, this year is on track to be the leanest for the sector since 2013, with $299 billion worth of private equity exits globally so far, according to Dealogic data.

Dealmakers expect 2024 to be busier, with interest rates beginning to ease, but the challenges are likely to stay, with borrowing costs still high and the gap between sellers' and buyers' price expectations, though narrowing, persisting.

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"You will probably see more deployments and exits, but I don't think 2024 will be dramatically different from 2023," said Silvia Oteri, partner at private equity firm Permira.

Still, Oteri, who heads up Permira's healthcare team, is more bullish about dealmaking prospects in that sector.

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Last month, the company joined Blackstone in a $15 billion offer for online classifieds group Adevinta, Europe's largest leveraged buyout this year.

New wave of consolidation

During a long spell of rock-bottom borrowing rates, capital raised by private capital funds nearly tripled between 2013 and 2021, when it peaked at almost $1.7 trillion, according to data provider Preqin.

Since then, it has slumped by a third to the $1.1 trillion raised by funds globally by early December 2023.

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Attracting new funds remains a challenge, which along with the need by some to diversify their investment strategies, could bring more consolidation, advisers said.

The number of funds closed in the 12 months to early December was the lowest since 2014, although the capital raised was in line with the $1.1 trillion annual average of the last decade, according to Preqin, suggesting greater concentration.

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"I would say the alternative asset managers space will absolutely consolidate," said Henrik Johnsson, Co-Head of Capital Markets and European Investment Banking at Deutsche Bank.

Alternative asset managers offer higher-yielding but less liquid investments, and with less money flowing into private equity, fewer are expected to survive.

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The reason for the fundraising slump is two-fold.

First, as stocks and bonds fell in value due to rising interest rates, private equity and infrastructure became overrepresented in pension fund portfolios, forcing them to reduce their allocation. Secondly, the slowdown in private equity exits made limited partners more reluctant to invest more money.

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"This market stress has created the recent bifurcation between those consistently strong performers that can command capital, and the rest," said Matthew Keogh, Investment Funds Partner at Linklaters.

Among those larger groups that faced challenges in their fundraising recently are Carlyle and Cinven, who were forced to prolong their fundraising or drop their targets this year because of tough market conditions.

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Last month, US investment giant Carlyle Group lowered the target for its latest pan-Asia private equity fund by at least 30 per cent from its original $8.5 billion, people with knowledge of the matter have told Reuters.

Cinven has exceeded its fundraising target for its eighth buyout fund only after asking investors for extra time earlier in the year, a person familiar with the plans said.

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Some have still fared better. CVC, for example, recently closed a record $26 billion buyout fund.

Investors in private equity funds are choosing to concentrate their investments with fewer, larger managers, Keogh said. That is leading funds to expand into new areas, such as infrastructure and private credit, in order to draw investors.

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In September, CVC announced a deal to acquire infrastructure manager DIF Capital Partners.

On Monday, French asset manager Tikehau Capital and Japanese competitor Nikko Asset Management said they were in talks to form a strategic partnership in Asia that will include Nikko taking an equity stake in Tikehau.

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"This trend of consolidation may persist in the foreseeable future, providing opportunities for existing fund managers to strengthen their positions," said Sandra Krusch, Private Equity Lead, Europe West at EY. As the industry matures, alliances help boost efficiency, reach new customer segments or expand into new asset classes, Krusch said.

Not all private equity firms feel the same pressure.

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"It's more for those that are publicly listed because (they) are valued based on their assets under management," said Nikos Stathopoulos, chairman, Europe at buyout group BC Partners, which oversees around 40 billion euros in investments.

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Published December 20th, 2023 at 11:41 IST