The economic challenges of 2023 have influenced private market performance, as evidenced by the McKinsey Global Private Markets Review 2024. Private equity fund performance hit its lowest point in 15 years, with closed-end real estate funds experiencing negative returns for the first time since 2009. Infrastructure fund performance also lagged, falling below its long-term average.
However, this downturn comes with a silver lining. With funds paying less for their investments, private equity buyout funds have seen a slight decline in acquisition prices. For instance, EBITDA multiples fell from 11.9 to 11.0 times in the first nine months of 2023, indicating a more favorable buying environment.
While recent years have been challenging, the brightest days for private markets are still ahead. Factors such as heightened investment activity, elevated yet stabilizing financing costs, and a growing demand for long-term capital are setting the stage for renewed optimism. Here are the top trends to watch out for and the road ahead for this industry.
Key Trends
1. Growth in Private Debt
The private debt sector continues to expand globally, venturing into new avenues of finance. This growth comes with a caveat: performance dispersion is significant, heavily influenced by borrower size and sector. As central banks initiate monetary easing, private debt is likely to benefit from increased deal flow and capital deployment, although investors express concerns regarding the impact of lower rates on performance.
2. Artificial Intelligence as a Transformative Force
Investors are increasingly recognizing the transformative potential of artificial intelligence across various asset classes, including infrastructure, debt, private equity, and real estate. This technological integration is expected to unlock new opportunities, enhancing operational efficiencies and driving growth.
3. Rising Deal Activity
Mergers and acquisitions (M&A) and initial public offerings (IPOs) are on the rise, indicating a more favorable exit environment for private equity. This uptick in deal activity is expected to generate more exits and distributions, invigorating the market and providing liquidity to investors.
4. Real Estate Valuations at a Crossroads
Real estate valuations are nearing their bottoms, creating potential opportunities for savvy investors. However, the path to price recovery will be gradual, with significant variability across sectors and regions. The effects of higher interest rates and the lingering impact of the COVID-19 pandemic have led to marked declines in asset values, particularly in commercial real estate.
The Road Ahead
A Turning Point for Private Equity
After two tumultuous years marked by the steepest interest rate hikes in two decades, 2024 has ushered in a period of monetary easing. This shift is expected to positively impact private equity valuations, deal-making activities, and exit strategies, suggesting that the industry may be turning a corner.
Venture Capital’s Resilience
Despite a challenging fundraising and exit environment in 2024, venture capital is anticipated to benefit from rate cuts, fostering improved performance and increased exit opportunities. This outlook highlights the asset class’s resilience and adaptability amidst changing economic conditions.
Real Estate Strategies Evolving
Real estate investors are recalibrating their strategies and risk exposures in response to the lower-interest-rate environment. Strategies focusing on core and value-added investments are likely to recover more swiftly, capturing investor interest and regaining momentum.
Infrastructure Fundraising Trends
While infrastructure fundraising remains subdued following a surge in 2022, the asset class continues to demonstrate resilient performance over the long term. However, geopolitical challenges are increasingly viewed as significant hurdles that could impact return generation in the coming year.
Conclusion
As we approach 2025, private equity stands at a pivotal juncture. The interplay of rising deal activity, evolving real estate strategies, and the integration of artificial intelligence promises to redefine the investment landscape. While challenges remain, the potential for recovery and growth in private markets is undeniable, setting the stage for an exciting era ahead.
