The exit dilemma weighs on private equity

In 2023, private equity continued to suffer from soaring interest rates - financing costs increased by 525 basis points from March 2022 to July 2023, the fastest tightening in decades - resulting in sharp declines in investment deals, exits and fundraising. In particular, the value and number of deals declined by 60% and 35% respectively from their 2021 peaks, with a slightly better performance in the second half of the year. The value of buyout investments fell 37% year-on-year to EUR 438bn, the worst value since 2016. The value of exits also contracted by 66%.

"The industry has never seen anything like what happened in the last 24 months. The declines are similar to what happened during the global financial crisis, but the situation today is completely different from what happened then. Buyout funds today have $1.2 trillion of liquidity, a quarter of which has been in their portfolios for more than four years: we expect operators to get back in the game. With the change we are seeing in the deal scenario, standing still is not an option. The exit conundrum is now really critical to solve as the market improves: the current threat to investor cash flows and industry liquidity is very real. Getting out of the impasse will require GPs to take their destiny into their own hands in terms of portfolio management to generate more distribution for LPs,' comments Roberto Fiorello, senior partner and head of Italian Private Equity at Bain & Company.

Although 2023 represented the steepest decline for global private equity since the global financial crisis, in 2024 the industry is experiencing an increase in activity, with some positive signs emerging.

"The market is off to a slightly better start this year, and we are cautiously optimistic about its prospects for 2024. The scale and speed of rate hikes last year, and the uncertainty of the macro environment, were a shock to the industry in 2023. However, the long-term outlook for the industry remains solid, and - with rates set to recalibrate in the coming months - there is a greater backdrop of stability. Liquidity levels are very high, and although major challenges persist, deal flow is strengthening,' Fiorello explains.

In 2023, there was a significant contraction in deal values and exits in Europar compared to 2022. The decline was seen on deals of all sizes, with the large deals - those above USD 2.5 billion - shrinking faster than the others. There was also a decrease in multiples, which has yet to fully compensate for the increase in interest rates.

European liquidity reached around $821bn in 2023, up 18% from the five-year average, at the same time buyout activity fell by around 46%, the worst year since 2016. The top 10 largest buyout investments in Europe in 2023 had a combined value of around $64bn and were made by a diverse range of buyers, two of them in Italy.

In Italy, the slowdown recorded in 2023, in terms of both number and value of deals - minus 53% of buyouts compared to 2022 - is mainly due to unfavourable macroeconomic conditions, in line with the global trend. The good performance recorded between 2012 and 2022 clearly shows the evolution of our country towards a more mature market than in the past. Locally, we are seeing a more even distribution of transactions by sector than in the rest of Europe, in line with the Italian economic ecosystem. The share of the technology sector is growing, although still lagging behind European levels.

Andamento dei buyout in Italia

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Report Bain

"The macroeconomic turbulence that characterised last year - inflation, geopolitics, interest rates - has not yet resolved itself. They will probably continue to influence investment positions, even in Italy, at least in the first half of the year. However, the flow of deals is strengthening in the country: several assets (especially in the mid-cap segment) are approaching exits in 2024, also by virtue of some delayed processes since 2023,' concludes Roberto Fiorello.