Investment banking executives noticed an uptick in dealmaking from private equity firms.
The increase is welcome for investment banks because private equity firms were slow to transact in the first quarter, with reduced financial sponsor activity being a hallmark of the M&A downturn that started in 2022. But financial sponsor dealmaking began to accelerate in the second quarter and throughout July, PJT Partners Inc. founder, Chairman and CEO Paul Taubman said on the company's earnings call.
Reports of an increase also came from executives at Evercore Inc., Houlihan Lokey Inc., Lazard Inc. and Moelis & Co. during recent earnings calls. Financial sponsor activity is up about 17% to 20% during the first half of the year, said Evercore CEO John Weinberg.
"We're seeing a significant number of bake-offs significantly larger than we have seen in the past," Weinberg said.
Ramping up
Financial sponsors are more actively examining their portfolios and looking for ways to exit investments, Weinberg said. Limited partners (LPs) invested in the private equity funds want to see some monetization, and that dynamic is positive toward deals ramping up, he added.
"LPs are looking for a return of capital, and they're pretty vocal about the fact that they want that to happen," Weinberg said.
Lazard CEO Peter Orszag also noted that investors in private equity funds want to see funds make investments. Dealmaking from sponsors is increasing for reasons that include "the desire among [LPs] to see some cash returns, the large amount of dry powder that potentially could expire unless it was put to work and importantly, the ongoing reduction in inflation," Orszag said.
Evercore reported an uptick in their financial sponsors' practice in the second quarter, due to improved market conditions and pressure from LPs for a return on their capital, Weinberg said.
"We remain highly focused on the opportunity within this client group and expect more robust sponsor activity will reinforce the broader recovery," he said.
Companies that run private equity strategies also noted the expectation for an increase. KKR & Co. Inc. reported a need to pick up the speed of capital deployment in the second half of the year to reach its goal of closing $9 billion in new private equity investments in 2024.
Blackstone Inc. executives reported signs of an imminent rebound in dealmaking, such as deploying $34 billion in the second quarter, up 73% from 2023, according to The Wall Street Journal. The firm has committed $19 billion to pending deals, according to the company's second-quarter earnings call.
Change in conditions
In recent years, transacting has been more difficult for private equity firms, said Moelis & Co. founder, Chairman and CEO Kenneth Moelis, because of the higher rate environment. In 2021, when interest rates were low, money was readily available from multiple sources at low rates and buyers worried valuations were going to increasingly rise.
"If you didn't close Monday, it might get more expensive on Tuesday," Moelis said.
Once the state of the market changed, financial sponsors worried about deploying capital because they knew raising capital for the next fund would be more difficult, Moelis said.
"As the private equity and the sponsor starts to see that they can go back out in the market and reload, they'll be much more attuned to putting out the money that they have," Moelis said.
PJT Partners' fundraising business for private equity, PJT Park Hill, is rebounding from a challenging performance last year, Taubman said. The fundraising environment remains subdued, but it has improved year over year, the executive said.
"We expect PJT Park Hill's 2024 results to be up significantly year over year," Taubman said.
While sponsor activity has improved, it is off a low base. Before the market can return to normal and a rebound can be confirmed, there needs to be a rate cut, Taubman said.
Still, the improvement can spur excitement in the market.
"You do see people gaining confidence in moving deals forward," Houlihan Lokey CEO Scott Adelson said.
