Advisory Blog

Diligent Value Creation Has Potential to Revive Private Equity Returns

What we are seeing

Until recently, private equity (PE) has performed well on the back of low interest rates and multiple expansion. We are seeing market participants adjust to a new normal environment of higher interest rates and inflation and lower levels of financial leverage. Moving forward, we believe a focus on value creation through operational enhancements to drive organic revenue and profitability growth will be crucial for delivering historical PE returns. Middle-market companies will likely provide the most attractive opportunities due the scalability of value creation efforts and increased exit alternatives.

Private equity dry powder continued to set new records. Preqin, a London-based private financial data company, expects global PE dry powder to surpass $1.6 trillion by year-end 2024. PE's 2023 and 2024 investment pace has been below historical levels, resulting in substantial capital in need of deployment. This pool of capital should provide a floor to valuations, further increasing the need to focus on value creation to drive returns.

As venture-backed companies stay private for longer, there is an increased need for growth equity and hybrid capital. Initial public offering (IPO) activity has been significantly below historical levels, resulting in higher demand for growth capital to fund the development for venture-backed companies.

What we are doing

Our private equity strategies have been focused on value creation since the global financial crisis (GFC). We continue to add value creation resources to our teams and refine our approach. We remain focused on the middle market as we believe our value creation initiatives can have the greatest impact with these companies. In addition, we believe middle-market companies retain greater exit alternatives than larger companies that are more focused on exits via an IPO.

What we are watching

We are watching to see how private equity investors react in early 2025. We believe with the stabilizing economy we should see increased transaction activity, providing new investment opportunities and increased return of capital to investors. This return of capital should support new fundraising initiatives, and over time, a return to normal cycle of private equity.