2024 European Private Capital Outlook: What is in store for H2?

Outlook: The European PE investments/exits ratio will reach a 15-year high due to a muted exit market stemming from price dislocation

PREDICTION

As we enter 2024, the European Private Equity (PE) investment to exits ratio is predicted to reach a 15-year high, driven by the current macroeconomic climate and a decrease in exit activities. This ratio, which measures the number of PE investments against the number of PE exits, has been climbing since 2015. Despite a drop in interest rates leading up to 2021's bull market peak, the capital deployed by General Partners (GPs) has outpaced exits and fundraising activities. A decrease in public listings and a dislocation in pricing between buyers and sellers has further slowed exits.

Looking ahead, we forecast that exits will continue to lag behind deal making due to lingering macroeconomic headwinds such as high inflation rates and the potential for economic recessions. With sponsors favouring Mergers and Acquisitions (M&A) over Initial Public Offerings (IPOs), we do not anticipate a strong return to IPO exits.

MIDYEAR UPDATE

Midyear updates reveal this outlook is generally on track, with the European PE investment/exits ratio trending slightly higher than end-of-year 2023 figures. Investment is down by about 22.1% but exits have plummeted by a more significant 26.5%. Monetary easing has not developed as quickly as anticipated, further affecting exits.

However, the second half of 2024 anticipates a moderate recovery in exits due to emerging opportunities such as PE-backed public listings. Additionally, actions from financial institutions like the Swiss National Bank, Sweden's Riksbank, and the European Central Bank to cut rates could alleviate debt pressures for buyout funds and potentially encourage more deal deployment as the macroeconomic climate evolves.

Outlook: PE fundraising concentration in the top three funds will hit a record percentage as fundraising drops from 2023 levels due to macro headwinds

In Pitchbook’s previous thought leadership article, "Private Equity Fundraising Trends: A Record Year Amid Macroeconomic Challenges," they delve into the impressive growth of PE fundraising in 2023 despite facing numerous economic obstacles, and provide an in-depth analysis of the anticipated trends for 2024.

In the article, they explored the paradigm shift that led to the top three funds accounting for an unprecedented 39.4% of the capital raised in 2023. They also cast light on how experienced PE managers navigated the trying market conditions. Looking ahead to 2024, we predict a drop in overall fundraising, but anticipate a continued concentration in top funds. 

MIDYEAR UPDATE

Their midyear update confirms they’re outlook is on track. However, a surprisingly robust H1 has raised questions despite a record concentration in top funds. The rest of the year remains uncertain, contingent on factors like central bank interest rate adjustments and their impact on capital availability. This article provides valuable insights for investors navigating the complex landscape of private equity fundraising.

Outlook: Megadeals will constitute less than 20% of overall PE deal value as uncertainty around the cost of debt persists

MIDYEAR UPDATE

Current figures align with these predictions; however, the volatility of the market and the potential for just a few large transactions could significantly alter these data. 

As we navigate 2024, the fluctuating geopolitical landscape and weak growth rates continue to make the cost of debt a serious consideration for PE firms seeking large-scale buyouts.

Outlook: The UK will remain the European leader for private capital, but France and Germany could close the gap amid a challenging geopolitical landscape

The UK has long been the European powerhouse for private capital, often surpassing Germany and France's combined deal value. However, as we move further into 2024, that dominance may begin to wane. Our December 2023 rationale showed that geopolitical shifts and developing opportunities in other nations could lead to a redistribution of capital deployment. Despite these predictions, the first five months of 2024 have seen the UK maintain its lead, driven by significant deals such as the €5.0 billion take-private of Darktrace.

However, the picture is far from clear-cut. With surprise snap elections in the UK and France and potential changes in policy on the horizon, uncertainty looms large. Should the Labour party succeed (which they did), their plans to hike taxation on carried interest could force fund managers to reconsider their locations.

France and Germany are not standing still, with the former in particular leveraging policy to cultivate a robust tech ecosystem. In a race with changing hurdles and checkpoints, any nation could emerge as the new private capital hub. The remainder of 2024 will undoubtedly be a fascinating watch as these stories continue to unfold.

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