3) Value creation
Strategic and operational improvements will continue to be the largest sources of PE returns. With opportunities for exits currently slower than historical averages, firms will zero in on efforts to create value in portfolio companies on the operations side. The focus will be on finding the sweet spot between cost-cutting and fueling future growth to prepare for anticipated improvements in the exit market.
Private equity’s four- to six-year holding period is the transformation window to pursue value, creatingopportunitiesacross sales, marketing, operations and finance. Using rapid diagnostics and narrowing down to opportunities that will drive EBITDA will provide clarity around top-line, bottom-line and capital efficiencies. This means that firms will need to understand the true cost drivers of the business and take appropriate action. Third-party spend, pricing and promotions, and tax savings will be prime areas of focus in 2024.
4) Working capital
EY research suggests that most portfolio companies continue to have enormous opportunities to improve in many areas of working capital, especially as optimizing operational value during extended hold periods takes on increasing importance. In the recent PE pulse survey, 80% of the PE professionals surveyed indicated that they were paying more attention than usual to helping companies improve their visibility into cash and liquidity needs.
To manage working capital more effectively, many PE-owned businesses have followed typical cash improvement methods, such as extending supplier terms, running down old stock or factoring some of the debtor book. Right sizing an IT organization and “lease vs. buy” technology options are two additional examples.
While these tactics can help, more firms are also considering adopting holistic tools that enable firms to optimize working capital and cut costs without reducing their capacity to drive top-line growth. Tools and processes that help organizations sharpen cash forecasting – knowing what’s needed where and when and include cash pooling and repatriation measures – can help optimize the use of existing cash within the business. This also provides increased optionality for management teams and sponsors.
5) Retail market expansion
Private equity firms will continue to experiment and develop expanded opportunities via the retail channel. Retail investors have the same attraction to PE as professional investors: asset class resilience, asset allocation diversification and exceptional performance vs. public markets.
To that end, more than 150 private equity firms have already invested in registered investment advisor (RIA) portfolio companies; nearly 30% of them offer crossover opportunities with at least five other wealth service portfolio companies. For many firms, retail inflows represent their fastest-growing source of new funds, leading them to develop new targeting methods for these investors. Moreover, an ever-increasing number of third-party platforms are providing new distribution channels.
In addition, with their existing M&A and investment models, most private equity firms are well positioned to offer wealth management services to retail investors. Some may even consider offering white-glove service as part of a holistic wealth management strategy, creating a true first-mover advantage.
Private equity has grown rapidly over the past 10 years and the current slowdown in deal activity, albeit brief, offers firms an excellent opportunity to leverage new technology – highlighted by AI and GenAI – and to deploy other operational efficiencies that will drive value creation and transformation in their portfolio companies. The firms that take this step will be poised to fully take advantage of new opportunities when deal activity and the IPO market rebounds.
FAQs
Private equity firms will focus on five key trends in 2024. Deploying artificial intelligence will lead the way, followed by investment in infrastructure particularly related to energy projects. Value creation will also be a priority as firms seek to improve strategic and operational efficiency.
What are the PE trends in 2024? ›
PE funds are increasingly using talent retention and recruitment as value creation tools in 2024. They are focusing on training employees on technology and AI tools for optimized productivity, ensuring employee satisfaction and wellbeing, and developing change-oriented and innovative leadership.
What is the value of private equity in 2024? ›
In Q2 2024, PE activity experience its strongest quarter in two years, with 122 deals valued at US$196b, nearly double from Q1's US$100b. This surge represents the highest capital deployment since the downturn in late 2022.
What is the middle market trend in PE? ›
Middle Market Summary
Q4 brought a 7.6% decline in deal value for middle market transactions compared to the previous quarter, accompanied by a 7.8% decrease in deal count. PE exits were also down in Q4, decreasing by 11.6%.
What's hot in private equity? ›
Private equity firms will focus on five key trends in 2024. Deploying artificial intelligence will lead the way, followed by investment in infrastructure particularly related to energy projects. Value creation will also be a priority as firms seek to improve strategic and operational efficiency.
What are the financial predictions for 2024? ›
The Global Economy in a Sticky Spot
Global growth is projected to be in line with the April 2024 World Economic Outlook (WEO) forecast, at 3.2 percent in 2024 and 3.3 percent in 2025. Services inflation is holding up progress on disinflation, which is complicating monetary policy normalization.
What is the outlook for private equity and venture capital in 2024? ›
We expect IPO activity levels to improve in 2024, on the back of strong public market performance and better-than-expected US GDP growth in 2023 and the likely conclusion of interest-rate hikes.
What is the forecast for private equity in 2025? ›
PE is showing the most growth potential among private assets and will very likely account for nearly 70% of alternatives AUM by 2025, according to Preqin. As it is, PE fundraising has been strong thanks to the asset class's exceptionally robust performance over the past decade.
What is the forecast for private equity? ›
How big is the private equity industry? The global private equity market size is expected to increase USD 1,246.08 billion by 2033 from USD 492.82 billion in 2023.
What are the 4ps of private equity? ›
But with more than 18,000 private equity funds, it can be tough to know where to start. A few tangible principles can help guide the way, including people, performance, philosophy, and process.
Their ability to achieve high returns is typically attributed to a number of factors: high-powered incentives both for private equity portfolio managers and for the operating managers of businesses in the portfolio; the aggressive use of debt, which provides financing and tax advantages; a determined focus on cash flow ...
How to succeed in private equity? ›
Private equity professionals work long hours and are highly competitive and must think critically, and have a passion for financial investing deals, not just following the markets. Other requirements to start a career in private equity are: Excellent grades and a notable transcript in school.
What is considered small market private equity? ›
USPE counts vary by metric and size ranging from 677 to 4,938 companies. Company size based on enterprise value at acquisition. Small cap = enterprise values of less than $250 million, mid cap = enterprise values from $250 million to $1 billion, and large cap = enterprise values greater than $1 billion.
What are the 3 market trends? ›
The three trends are primary, secondary, and minor. The primary trend is the long-term trend, called a bull or bear. Secondary trends are smaller trends, such as a market correction.
What is considered a mid-size private equity firm? ›
Lower middle market (LMM) – Deal sizes in the LMM range from $25 to $100 million, with the greatest growth potential. Companies in the LMM rely the most on private equity capital and expertise to scale. Core middle market (CMM) – Deal sizes in the CMM range from $100 to 500 million.
What are the stock market expectations for 2024? ›
As a whole, analysts are optimistic about the outlook for stock prices in 2024. The consensus analyst price target for the S&P 500 is 5,090, suggesting roughly 8.5% upside from current levels.
What will technology look like in 2024? ›
I anticipate significant advancements in digital transformation in 2024, with the emergence of new business models, converging technologies such as robotics, AI, automation, IoT, A/VR and increased demand for data-driven experiences. Fortune will favor the brave in the AI revolution.
Is the private equity industry growing? ›
The private equity market has grown substantially, and as of 2021, private equity firms manage roughly 20% of U.S. businesses.
How has PE changed over the years? ›
Additionally, the physical elements of P.E have also evolved. With greater research and knowledge, fitness has become focused on a wider variation of activities that use different movements and techniques. P.E today also emphasises the value of exercise in physical and mental well-being.
