The previous 12 months have been among the hardest in the recent history of the buyout industry since investors have become more frugal with their funds and private capital fundraising has dropped to five-year lows, according to industry leaders and advisors who spoke to Reuters.

It is anticipated that these pressures would persist in the new year, compelling private capital groups to sell assets in order to reimburse investors, often referred to as limited partners (LPs), for their money and, in certain situations, making them acquisition targets for bigger competitors.

“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.

Infrastructure was the most severely affected asset class by the fundraising crisis, however private debt remains one of the most widely used tactics, making up 16% of total capital raised.

Based on the number of deals completed so far, this year is expected to be the lowest for the industry since 2013. Dealogic data shows that private equity exits have totalled $299 billion worldwide.

Dealmakers anticipate a busier year in 2024 as interest rates start to decline, but difficulties are likely to linger because borrowing costs are still high and the difference between buyers’ and sellers’ price expectations is still there despite reducing.

“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.

Nevertheless, Oteri, who leads Permira’s healthcare division, is more optimistic about the prospects for dealmaking in that industry.

The business participated with Blackstone in the largest leveraged buyout in Europe this year, a $15 billion offer for the online ads company Adevinta, last month.

According to data source Preqin, the amount of money raised by private capital funds nearly tripled between 2013 and 2021, when it peaked at about $1.7 trillion, during a protracted period of extremely low borrowing rates.

Since then, the amount of money raised globally by early December 2023 has dropped by a third to $1.1 trillion.

It’s still difficult to draw in fresh money, and some investors feel that they need to diversify their approaches, which could lead to further consolidation, according to advisors.

The number of funds closed in the year ending early December was the fewest since 2014. However, Preqin reports that the capital raised was comparable to the $1.1 trillion yearly average of the previous ten years, indicating a higher degree of 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 provide investments with better yields but lower liquidity, and fewer are anticipated to survive as less capital is pouring into private equity.

There are two main causes for the decline in fundraising.

First, pension funds were forced to decrease their allocation as private equity and infrastructure became overrepresented in their portfolios as a result of the declining value of equities and bonds brought on by rising interest rates. Second, limited partners became less inclined to make new investments as a result of the slowdown in private equity exits.

“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.

Carlyle and Cinven are two of the bigger companies that have had difficulties raising money lately. Due to difficult market conditions, they were obliged to extend their fundraising efforts or lower their goals for this year.

According to persons with knowledge of the situation who spoke to Reuters last month, American investment firm Carlyle Group cut the goal for its most recent pan-Asian private equity fund by at least 30% from its initial $8.5 billion plan.

According to a source familiar with the preparations, Cinven only surpassed its fundraising goal for its eighth buyout fund after requesting more time from investors early in the year.

Even so, others have done better. For instance, CVC just concluded a record-breaking $26 billion buyout fund.

According to Keogh, investors in private equity funds are opting to concentrate their holdings with a smaller number of managers. This is pushing funds to diversify into new markets to attract investors, like private credit and infrastructure.

CVC stated in September that it will buy DIF Capital Partners, an infrastructure company.

Rival firms Tikehau Capital, based in France, and Nikko Asset Management, based in Japan, said on Monday that they were in discussions to establish a strategic alliance in Asia, which would involve Nikko acquiring an ownership position in Tikehau.

“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.

Private equity businesses are not all under the same strain.

“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.

(Adapted from Reuters.com)

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