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

Adevinta ASA

20/12/2023 06:00

By Andres Gonzalez and Pablo Mayo Cerqueiro
       LONDON, Dec 20 (Reuters) - 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.
    "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% of all
capital raised.
    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.
    "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.
    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.  
    

    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.  
 
    "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.  
    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.
    "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. 
    Last month, U.S investment giant Carlyle Group  CG.O 
lowered the target for its latest pan-Asia private equity fund
by at least 30% 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. 
    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.
    In September, CVC announced a deal to acquire infrastructure
manager DIF Capital Partners.
    On Monday, French asset manager Tikehau Capital and
Japanesse 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  TKOO.PA . 
    "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.
    "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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Private capital golden era coming to an end    https://tmsnrt.rs/4814rkU
Private capital golden era coming to an end    https://tmsnrt.rs/3the5Rx
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 (Reporting by Andres Gonzalez and Pablo Mayo Cerqueiro;
additional reporting by Emma Victoria Farr. Editing by Anousha
Sakoui and Tomasz Janowski)
 ((andres.gonzalez@thomsonreuters.com; +44 (0) 7551 790019;
Reuters Messaging:
andres.gonzalez.thomsonreuters.com@reuters.net))