Activity in the first half of the year was defined almost exclusively by larger take-privates and smaller bolt-ons. As the year progressed, announcements broadened to include a growing array of secondaries, carve-outs, and private-to-privates. As 2024 begins to unfold, market participants expect many of these deal types to continue. While take-privates have fallen from their Q1 peak, a compelling population of attractive targets remains. The fourth quarter, for example, saw a number of take-privates including Blackstone’s acquisition of Adevinta; at US$15b, it was one of the largest deals announced last year.
Although higher interest rates have made financing deals more challenging, investors also expect them to be a tailwind for certain types of activity in the coming year. In the US, the leveraged loan default rate sits below its long-term average (at about 1.4%); however, pressure is building across parts of the system. S&P’s Weakest Link Index (comprised of issuers that are rated B- or below that have a negative outlook or implication), has grown by more than 50% over the last 12 months, and interest coverage ratios for have been falling steadily as well, to 3.8x (down from 5.6x last year) according to Pitchbook Leveraged Commentary and Data. These dynamics open opportunities for PE firms with dry powder and the proper expertise to assist companies through volatile macro periods.
In a survey of PE investors conducted by EY in late November and early December, 63% of respondents expect an uptick in distressed transactions over the next year. Respondents also expect an increase in secondary buyouts - with roughly US$1.3t in PE dry powder available to fund new deals, firm are well-positioned to acquire companies from sponsors seeking an exit and usher them through their next phase of growth. As one survey respondent said, “I expect private equity to face some headwinds in 2024 due to high inflation, rising interest rates, and a potential macro slowdown. However, PE firms with capital to deploy should still find select opportunities, especially in distressed assets, as the environment shakes out weaker companies."