While 2023 was characterised by economic uncertainty, 2024 holds promise for the private equity sector. Firms still face significant headwinds, such as high interest rates and weak economic growth, but signs of a revival are starting to show. Inflation continues to fall, and interest rates have stabilised, bringing more certainty to financial projections.
There is also a substantial reserve of pent-up deal flow. Private equity exits are down, which is shifting the portfolio base along the investment lifecycle. As a result, more companies now reside in the ‘maturity and exit’ stage. Additionally, the valuation gap between buyers and sellers is narrowing, which bodes well for activity in 2024. To summarise, indicators point towards 2024 being a more robust year for dealmaking.
Key Takeaways
- 2024 looks brighter than 2023 for private equity, with more deals expected as economic headwinds ease.
- Record dry powder and pent-up deal flow will fuel 2024 activity, but high competition is expected.
- IPOs may experience a revival, partly driven by potential interest rate cuts.
- Bolt-ons and take-privates are set to flourish.
- The US market is expected to see higher deal volumes due to interest cuts later in the year.
- AI solutions will thrive within TMT, Residential Services will attract interest due to durable demand drivers, Consumer Health will centre on VMS and pain management, and Leisure and Travel will likely experience a year of mixed performance.
Global Dry Powder Reaches All-Time High
As of December 2023, dry powder soared to $2.59 trillion as a slow dealmaking year ended with limited capital deployment opportunities. This unprecedented accumulation is rooted in the robust M&A market, which set high valuation expectations for sellers. Despite less than favourable macroeconomic conditions in 2023, valuation expectations remained high for much of the year.
With abundant dry powder waiting to be deployed, private equity firms will likely face high competition, especially for high-quality assets. The pressure to deploy capital will likely lead to the exploration of alternative investment strategies, including expansion into new geographies or focusing on niche sectors. Additionally, given the high entry valuations, there will likely be a renewed focus on post-investment value creation, particularly digital transformation initiatives.
More Private Equity Firms Weighing up IPOs
The IPO landscape has been particularly quiet over the past two years. Companies that have taken the IPO route over the last few years have seen mixed success. For example, UK gaming company Streaks Gaming completed an IPO of £3 million in January 2023, significantly less than its expected valuation of £10.2 million.
Despite some high-profile IPO failures, there are signs that IPOs will experience a revival, driven partly by potential interest rate cuts. Several prominent companies from the US, including Reddit and Stripe, along with UK-based firms such as Brewdog, Virgin Atlantic and Revolut, are anticipated to launch their IPOs this year.
Last month, global growth equity investor General Atlantic filed its intention to go public with the SEC, signalling that an IPO could materialise within the year. The firm is not alone in its intentions—other private equity firms are thought to be considering IPOs in 2024. The public offering route is an attractive avenue, particularly at a time when liquidity is tight.
The Palladium Group is positioned to assist firms with preparing a robust sell-side book, conducting due diligence to ensure it accurately reflects the asset’s value and growth prospects, priming it for a successful IPO. Beyond these preliminary stages, we can also provide value creation and growth strategy expertise to enhance the long-term value of portfolio companies. Post-IPO, we can inspire digitally-led change to help firms navigate the complexities of the public market, helping them succeed in a landscape that demands continual adaptability and innovation.
Growth Deals Through Bolt-Ons
While interest rate cuts may make the financing of larger deals more straightforward in 2024 compared to last year, sourcing and executing smaller deals with high growth potential through value creation and bolt-ons will likely appeal to private equity firms of all sizes.
In sectors where organic growth may not be sufficient for the growth objectives of private equity investors, the sourcing of EBITDA-additive bolt-ons that can simultaneously add market or service diversification or entry into new geographies is expected to be a core focus in the next 12 months. However, challenges in accurately sourcing and evaluating these typically smaller businesses lend themselves well to a proxy data approach as well as management information.
Sector Diversification
As larger and more diversified GPs encounter increasing competition in securing new deals within their primary sectors, a notable shift is expected towards exploring growth in parallel or adjacent industries. These fields, rich with untapped potential, are particularly attractive in terms of opportunities for digital maturity. This diversification strategy prioritises technology-driven growth engines in key sectors like healthcare (telehealth and AI diagnostics), business services (data analytics and automation) and consumer/e-commerce (AI-powered personalisation).
Take-Privates Set to Flourish
Reversing the 2022 trend, when only 13% of GPs expressed intentions of pursuing take-privates, 94% of GPs expect to pursue take-privates within the next year. Furthermore, 63% foresee growth in take-private activity by private equity firms. Ben Martin, Global Head of Transaction Advisory (Growth) at The Palladium Group, explains how firms can increase the chances of success with take-privates: “The ability to conduct outside-in diligence on these companies before conversations with shareholders will help avoid early mismatches in valuation expectations. Additionally, this will allow private equity sponsors to consider the value creation opportunities in the context of competitive landscapes in order to make a well-informed offer.”
Expected Uptick in US Dealmaking Activity
The economy is expected to grow quicker in the US than in the UK, at 1.5% per year on average throughout 2024 and 2025, compared to 0.8% in the UK. Scott Miller, Senior Vice President of US Growth and Operations of The Palladium Group, shed some light on what he expects over the next year: “The Federal Reserve indicated possible rate reductions, and this, combined with six months of market stability, will pile on the pressure to exit existing portfolios and put held-back funds to work.” The market conditions are ripe for a relative surge in dealmaking activities, and this environment will create a competitive landscape for high-quality assets, resulting in higher deal volumes.
2024 Sector-Specific Trends
We are seeing signs of heightened activity in various sectors, including TMT, Residential Services, Consumer Health and Leisure and Travel:
Technology, Media and Telecom (TMT)
UK/Europe
The TMT sector in the UK and Europe is expected to thrive, partly due to the proliferation of AI solutions. However, with the European Union set to roll out comprehensive AI regulations, firms face the challenge of balancing regulatory compliance with innovation. This regulatory landscape will lead to a more methodical and careful integration of AI, focusing on its meaningful and wide-ranging potential.
To learn more about how private equity firms integrate AI into the deal process, watch the recording from our recent AI event: Cracking the Code: AI's Impact on Private Equity Deals. Alternatively, you can read our thoughts on the insightful discussion.
US
In the US, TMT is also poised for a resurgence. Technology will continue to be an attractive sector for private equity as, in recent years, technology investments have outperformed other market sectors. Similar to the UK and Europe, there will be a strong focus on the practical and strategic implementation of AI technologies. Beyond AI, firms are likely to hone in on sustainability solutions and sports assets in need of digitalisation.
Residential Services
US
The residential services industry remains an attractive investment, regardless of the state of the economy. However, in the last four months of 2023, residential services saw accelerated activity. This has continued into 2024, with deals spanning HVAC, plumbing, electrical, foundation repair, roof repair, doors and windows, pest control and many more.
The fragmented residential services market is ripe for consolidation with durable demand drivers. First, the slowdown in housing turnover means people stay in their homes longer due to higher interest rates, favouring their locked-in lower mortgage rates. The housing stock is also ageing, leading to more maintenance requirements as homes experience natural wear and tear.
Consumer Health
UK/Europe
In 2021, consumer health experienced a bumper year. However, demand dampened as markets cooled in late 2022. While the consumer health slowdown is likely to continue into 2024, certain segments are poised to attract interest from investors due to heightened consumer focus on well-being, including vitamins, minerals and supplements (VMS), pain management and organic and alternative products.
US
2023 was a challenging year for healthcare businesses in the US. However, as headwinds ease in 2024, private equity firms will find more opportunities to purchase distressed healthcare businesses. This will allow firms to optimise costs and facilitate the industry’s transitions towards more consumer-centric healthcare models.
Leisure and Travel
UK/Europe
Despite macroeconomic headwinds, the leisure and travel sectors showed signs of resilience and consumer demand. Travel demand has shown remarkable resilience in the UK and Europe despite inflationary and interest rate pressures as consumers increased their travel budgets.
The leisure sector is set to experience a year marked by contrast as consumer budgets remain tight, but interest in health and well-being grows. The gym and health clubs market is estimated to grow at a CAGR of 3.91% between 2023 and 2028. In the UK, there were fewer gyms in 2023 than in 2022. However, member numbers are increasing, and market value continues to climb, offering potential opportunities for investors.
Since the pandemic, leisure and sportswear brands have seen positive momentum as consumers prioritise healthy lifestyles. Athleisure is projected to grow at a CAGR of 9.20% between 2024 and 2032. Growth-orientated funds are snapping up investment opportunities in this area. For example, the Raine Group’s flagship growth equity fund, Raine Partners, recently led a £145 million investment round for UK-based sportswear brand Castore.
US
On the other side of the Atlantic, the US Travel Association’s biannual forecast for travel revealed that domestic leisure travel is expected to remain strong, with normalised growth rates around 2% in 2024. One poll found that 55% of US consumers say they intend to travel for leisure in 2024, a similar figure to the poll conducted the year previously. However, 2023 ended on something of a low note for the industry. Tourism and leisure M&A activity in North America decreased by 66% in Q3 2023 compared to Q3 2022.
Post-pandemic, demand for athleisure increased rapidly, with North America holding the largest share of the market. In 2022, the sports and swimwear market in the US was worth $67 billion and is expected to reach over $85 billion in 2026. This impressive growth trajectory made US athleisure brands attractive targets for companies looking to expand their portfolios in fast-growing industries. Despite the economic slowdown, athleisure has shown resilience. US brands holding significant market share in the athleisure sector, such as Nike, Under Armour and Patagonia, reported solid performance despite strong headwinds.
Final Thoughts: The 2024 Private Equity Outlook
With record amounts of unspent investor cash and a stockpile of ageing deals, 2024 may be characterised by more aggressive deal-making as firms seek to deploy funds effectively. Additionally, the pressure to invest funds might drive firms to explore new opportunities and sectors that may not have been on the radar originally, potentially accelerating the pace of M&A transactions. Our exploration into sector-specific trends highlights high-potential areas in the UK, Europe and the US, with TMT, residential services, consumer health and the leisure and travel sectors showing particular promise.
If you seek new investment opportunities in 2024 and you want to optimise your current strategies, The Palladium Group is ready to assist you. We identify and drive opportunities for digitally-led change, providing a springboard for accelerated growth and successful exits. Our services span Transaction Advisory, Value Creation and Growth Strategy Consulting, providing you with a comprehensive suite of solutions to support your investment needs.
Contact The Palladium Group today to find out how we can assist you.
