The shifting role of LPs was the overarching theme for the morning session of Day 2, at the 10th edition of IPEM in Cannes. After a full day of yoga,…
Private market investors have seen an extended period of deal activity over the last decade but the investment optics have changed in 2023. Higher rates, inflationary pressures, and volatile markets, have generated uncertainty and impacted deal volumes. As Bain & Company point out in their 2023 mid-year PE report, “uncertainty is the enemy of dealmaking”.
They note that through the first six months of the year, global buyout funds oversaw 863 deals and $202 billion in deal value. This is a 58% fall on the same period last year. In Europe, VC deals have fallen even more sharply; down 60% compared to the first half of 2022 according to Pitchbook.
Raising the bar?
With an estimated $2.8 trillion in unrealised assets, buyout funds must also grapple with a challenging exit environment, as they aim to generate much-needed distributions to their LPs. Global private equity exits in the year to Sept 30th totalled 1,294. This is some way off last year’s full-year aggregate of 1,584 exits. Whether it is doing deals on the way in, or the way out, 2023 has been a testing period.
All of which will require LPs to look closely in 2024 at how effective PE firms are at sourcing the right opportunities, as well as continue to create new liquidity routes. Arguably, the bar has risen in terms of how LPs look at managers’ track records and their ability to increase the multiple on invested capital.
“As the cost of capital is higher and capital is scarcer – investors allocating less because of the denominator effect or because of liquidity issues (fewer DPIs being made) – then mathematically you could say the bar is getting higher,” comments Jean-Francois Le Ruyet, Partner at Quilvest Private Equity in London where he sits within the funds and co-investments team. He continues: “Investors are allocating less capital to fewer funds. That has been the direction for 2023 and I think it will continue for at least the first half of 2024. Even if the market turns and IPOs come back in force, it will take time to translate in to more distributions.”
One of the topics of discussion on Day 2 at IPEM Cannes 2024 will be “Exploring track records: What’s a successful deal for LPs?”