The downturn in US PE exit value, which worsened in late 2022 and has carried over into 2023, is even bigger than what the market endured during the global financial crisis, resulting in an estimated $60 billion shortfall in deal value, PitchBook data show.
Although the overall slump in dealmaking has been abundantly clear, the findings from PitchBook's latest Quantitative Perspectives report place the United States' drop-off in PE deals and steep fall in exit value into historical context. The authors of the report also point out the implications the trend will have for limited partners in PE funds.
Relative to long-term trends, only the COVID-19 lockdowns-induced market shock in 2020 led to more lost exit value than the current decline, according to the report.
Based on an analysis of trends from the past two decades, the authors estimate that since 2019 the market should have seen roughly $60 billion more in exit value across an additional 664 deals. The shortfall in that four-year period was driven by the recent drop-off in deals.
During a PE exit backlog, less capital gets returned to LPs, dragging out their investments' life cycles longer than expected. In a general sense, the less capital a fund sends back to LPs, the lower it performs compared to peers.
Even if exits were to bounce back to their recent trend in a quarter or two, the impact of the drop-off is expected to reverberate in funds' internal rates of return, or IRR, one of the key metrics used to track fund performance, said PitchBook senior analyst Andrew Akers, a co-author of the report.
PE funds' ratio of total volume to capital paid in, or TVPI, can recover, Akers said, but because IRR takes into consideration the timing of cash flows, the longer the exit drought drags on, the lower fund performance will be.
"From an IRR perspective, it's really hard to recover from your distribution getting pushed back," Akers said. "There's going to be immediate fund performance implications for LPs and fund managers."
Strategic buyers became a more popular target for PE exits in Q1, making up nearly 70% of all acquirers of PE-backed companies as other sponsors found debt more difficult to access and the IPO window remained shut. Companies with cash on hand or pre-rate-hike credit facilities were able to announce deals, such as Australia-based WiseTech Global's $414 million acquisition of US intermodal rail company Blume Global from Apollo Global Management, EQT and others.
In Europe, Shell's planned acquisition of Nature Energy for nearly $2 billion from Pioneer Point Partners, Sampension and Davidson Kempner Capital Management followed the same playbook.
PE firms' exits had an enterprise value of $55.8 billion across 279 deals in Q1, representing a 34% drop in exit value and 15% drop in exit count year-over-year, according to PitchBook's latest US PE Breakdown.
The true extent of the slowdown may seem counterintuitive in view of the recent encouraging data on consumer spending and US economic growth.
"It's fairly benign conditions for this kind of slowdown," Akers said. "I think it also speaks to the overextension we saw in 2021, when so much was happening in private markets. We're paying a little bit of that back."
The exit slowdown is only one half of private equity's 2023 troubles. For new investments, overall PE deal volume fell 9.3% in Q1 from the previous quarter, but that decline wasn't evenly distributed among deal types.
In the six-month period ending March 31, add-ons and PE growth deals—which rely less on debt than buyouts—closed at paces well above long-term trends, and the value of those deals was higher than usual, too.
Read more: Q2 2023 Quantitative Perspectives: Pumping the Brakes
Featured image by Hamat Calderon/Shutterstock
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PE exits are slower than during the global financial crisis - PitchBook News & Analysis
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