“While green shoots are visible, the market is not in full bloom,” noted information and data provider Preqin in a report at the end of July. Private markets rose in Q2, “but interest rates continue to hold investors and deal-makers back.”
The first signs of a slowdown were felt in 2022, which was still a good year for unlisted assets. The reason for this was the rise in interest rates, which led to higher financing costs. Some investors, such as large pension funds, have also been affected by the denominator effect, which occurs when falling stock markets lead to an overexposure to alternative assets. Depending on their internal rules, these investors have had to readjust their portfolios.
As a result, fundraising has become more complicated. While more and more funds are looking for capital, they are faced with highly selective investors. This is difficult for small and medium-sized funds, which are struggling to raise new capital. Big funds, on the other hand, are doing well, but at the cost of more effort, time and money than before. “Capital is being raised with fewer and larger funds,” said Preqin, and Q2 has “confirmed the trend towards industry concentration.”
Exits frozen
Between the first and second quarters, global private equity (PE) fundraising fell by 6%, from $178bn to $151.5bn, according to Preqin. With $105.4bn raised, funds focused on North America accounted for the “lion's share” of fundraising between April and June.
Another key PE indicator is that deal volume has also fallen since 2022. New, more sophisticated transactions take longer. They incorporate more risk scenarios and stress tests, and the terms of purchase and valuations give rise to more discussion.
At the same time, exit deals have ground to a halt. Economic uncertainty has discouraged the market from proceeding with IPOs or asset sales. Usually, the investment made by a fund at the time of an IPO is sold after five years, allowing the gains to be redistributed and reinvested in new funds. Today, however, many funds have not yet monetised their old holdings, creating an imbalance in the market.
There is a lot of proprietary data and many things that cannot be disclosed publicly
Preqin observes a warming between the first and second quarters of 2024, both in terms of the total value of deals (+46%) and exits (+47%). However, this increase comes from a smaller number of larger transactions, with a 9% decrease in the number of new deals and only a 2% increase in exits--indicating, according to Preqin, that “a broad recovery of the deal-making market remains elusive while interest rates and inflation remain stubbornly high.”
That’s for the overall picture. For Luxembourg in particular, there is not a great deal of data. “It’s not that PE is confidential or ‘black box,’ not at all, but there is a lot of proprietary data and many things that cannot be disclosed publicly, given that we work outside the listed segment,” explains , CEO of the Luxembourg Private Equity & Venture Capital Association (LPEA).
Every year, the Luxembourg Financial Sector Supervisory Commission (CSSF) publishes its “AIFM Reporting Dashboard.” Its 2023 edition, published recently, does not invite doom and gloom: despite the economic climate, alternative investment funds grew by 14% last year in value terms, reaching €2.057trn. PE funds, in particular, gained 21% to €623bn, a new high in terms of value.
The country remains attractive to new private equity managers.
“Luxembourg key indicators remain positive despite delays in getting back to what was believed to be standard fundraising rhythm,” notes Valérie Tixier, private equity client and market leader at PWC Luxembourg. Luxembourg-domiciled PE fundraising amounted to €60.9bn in 2023 and €49bn in the first half of 2024 (excluding funds of funds and secondary funds), estimates the PWC Global AWM & ESG Research Centre, based on Preqin data.
As an example of a positive indicator, PWC refers to the dry powder reserves of Luxembourg-domiciled PE funds, which reached €41.3bn in 2023 and are estimated at €40.2bn for the first half of 2024 alone.
“On the Luxembourg market in general, we can observe that the country remains attractive to new private equity managers that did not necessarily have European domiciled funds previously,” comments Tixier. “Hence we still observe an overall sustained growth of the industry on the market despite the still relatively slow deal activity level. Growth is also sustained with the increased level of activity in secondaries and emerging investment strategies such as NAV financing, for example.”
What’s the outlook for the private equity market? Find out in Tuesday’s interview with LPEA CEO Stéphane Pesch.
This article was originally published in .