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Private equity exit value sinks to 3-year low in Q1

The value of global private equity-backed exits sank to its lowest quarterly total in more than three years in the first quarter of 2024 as higher interest rates continued to drag on private equity deal activity, according to an S&P Global Market Intelligence analysis of Preqin data.

Global PE exits totaled $81.2 billion in the first quarter of 2024, down 22% from $103.8 billion in the first quarter of 2023, according to Preqin data. It was the lowest quarterly exit total for private equity firms since the onset of the COVID-19 pandemic sharply curtailed exit activity in the second quarter of 2020.

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Investor expectations are that a recovery in exit value is poised to begin sometime this year, and a recent decline in portfolio company holding periods hints that fund managers are finding viable exit routes. Peter Kahn, a senior partner for consultant West Monroe, said the firm had seen a "huge uptick" in private equity firms preparing for sales processes in the first quarter as fund managers face mounting pressure to return profits to investors.

“People are busy. They’re building up pipelines. [It's] much busier than we’ve seen in the last 18 months,” Kahn said.

Signs of progress

Global PE exit value totaled just $575.8 billion in 2023, the lowest annual total since at least 2019, according to Preqin data. As Bain & Co. noted in an annual private equity outlook report issued in March, higher interest rates and an uncertain macroeconomic outlook made it difficult for buyers and sellers to see eye-to-eye on portfolio company valuations.

Exiting into public markets remained challenging, too, with private equity firms recording just $70.6 billion in exits via IPO or the sale of shares in publicly-listed companies, their lowest total since at least 2019, according to Preqin data.

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The number of total exits was nearly unchanged in 2023 from the year before, but last year's steady, quarter-over-quarter growth in the global exit count suggested fund managers were making progress on the backlog of deals. While the average holding period for a private equity portfolio company acquired via buyout soared above 5.8 years in 2023, the average had come back down below 5.6 years as of April 15, according to Preqin data.

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Stubborn interest rates

Hopes for an exit revival in 2024 were pinned to the prospect that central banks would soon ease off their two-year battle with inflation and cut interest rates, making deal financing cheaper for acquirers, said Jeremy Swan, managing principal in CohnReznick’s financial sponsors and financial services industry practice.

But a barometer of inflation in the US, the consumer price index, increased more than expected in March, likely delaying rate-cutting action by the Federal Reserve and limiting the total number of cuts possible in 2024, Swan said.

“You’re not going to see the cost of debt coming down as quickly. That is a major component [of the lower M&A activity], particularly on the private equity side," he said.

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Kahn said he still anticipates a 15% to 20% increase in private-equity-backed exit activity in 2024 over 2023. Returning money to investors is critical for fund managers hoping to raise a new fund in the near future, he noted, adding that reduced uncertainty around the path of interest rates and the global economy should give a boost to M&A.

“It’s more of a calmer, level playing field than it was the beginning of last year when interest rates were still going up," Kahn said.

Largest exits

Cisco Systems Inc.'s $28.5 billion acquisition of cybersecurity firm Splunk Inc., first announced last year, was the largest private-equity-backed exit to close in the first quarter.

Half of the top-10 largest private-equity-backed exits completed in the first quarter targeted companies in the healthcare sector, including the quarter's second-largest exit, Bristol-Myers Squibb Co.'s acquisition of clinical-stage biopharmaceutical company Karuna Therapeutics Inc. from a group of private equity and venture capital investors.

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