Private equity payouts fell 50% short in 2024

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Private equity funds cashed in only half the value of the investments they typically sell in 2024, the third year in a row that payouts to investors have fallen short due to a deal drought.

Buyout houses typically sell 20 percent of their investments in any given year, but industry executives predict cash payouts for the year will be about half that figure.

Cambridge Associates, a leading adviser to large institutions on their private equity investments, estimated that over the past three years the funds have fallen about $400 billion short of historical averages in payouts to their investors.

The data underscores growing pressure on companies to find ways to return cash to investors, including through more exits in the coming year.

Companies have been struggling to strike attractively priced deals since early 2022, when rising interest rates sent funding costs soaring and corporate valuations down.

Dealmakers and their advisers expect merger and acquisition activity to pick up in 2025, potentially helping the industry work through what consultancy Bain & Co. called a “strong backlog” of $3 trillion in stale deals to be sold in the coming years. :

Several major IPOs this year, including food trucking giant Lineage Logistics, aviation equipment specialist Standard Aero and dermatology group Galderma, have given private equity firm executives the confidence to take companies public, while the election of Donald Trump has added to the excitement on Wall Street. :

But Andrea Auerbach, global head of private equity at Cambridge Associates, warned that the industry’s problems could take years to resolve.

“There is an expectation that the wheels of the output market will start turning. But it doesn’t end in a year, it will take several years,” Auerbach said.

Private equity firms have used new tactics to return cash to investors, while holdings have struggled to sell.

They have increasingly used so-called continuation funds, where one fund sells shares of one or more portfolio companies to another fund that manages the company, to engineer exits.

Jefferies predicts that there will be $58 billion in ongoing fund deals in 2024, representing a record 14 percent of all private equity exits. Such funds accounted for just 5 percent of all exits in the boom year of 2021, Jefferies found.

But some private equity investors are skeptical that the industry will be able to sell the assets at prices close to the funds’ current valuations.

“You have a huge amount of capital invested on assumptions that are no longer valid,” a major industry investor told the Financial Times.

They warned of a record $1 trillion-plus in purchases in 2021, just ahead of a rate hike, and many deals on the books of companies with overly optimistic valuations.

Goldman Sachs noted in a recent report that sales of private equity assets, which have historically been made at at least 10 percent of the funds’ intrinsic valuations, have been done at discounts of 10 to 15 percent in recent years.

“[Private] Equity in general is still overextended, leading to this situation where assets are still stuck,” Michael Brandmeier of Goldman Sachs Asset Management said in a report.