Private equity (PE) investors and dealmakers have faced headwinds since the COVID-era boom of 2021 – including higher interest rates, persistent inflation, widely divergent valuation expectations, market and geopolitical upheavals and heightened regulatory scrutiny. And 2024 has so far presented a continuation of many of these challenges.

But adversity is the crucible of innovation, and although the volume of PE buyouts remains down from its post-COVID peak, sponsors have been deploying creative approaches to fill financing gaps, navigate uncertainty and get deals done. What follows is an overview of key trends and developments in the PE space of late.

Acquisitions and Exits

Buyouts stall, for now

Private equity deal volumes have continued their decline from their pandemic heights. Deal volumes for the first six months of 2024 annualise to approximately USD1.2 trillion, in line with 2023 and a decline from USD1.7 trillion in 2022 and a record USD2.2 trillion in 2021. The continued stall, however, comes amidst broader challenges facing M&A generally; private equity’s share of overall M&A deal volume for the first half of 2024 (33%) was above both first-half and full-year 2023 levels (32% and 30%, respectively) and only modestly below full-year 2022 and 2021 levels (both 35%). Persistently elevated interest rates, valuation fundamentals and the "expectations gap" between sellers and buyers all deserve their due for the continued M&A slowdown.

In this environment, sponsors have had to be creative and nimble in identifying opportunities and structuring deals – and with some examples of success. So far, 2024 has seen 11 US deals larger than USD5 billion, as compared to five for the same period in 2023. The technology sector in particular continues to be one of the more robust sources of private equity activity, as debt funds continue to be willing to provide moderate but important leverage to "recurring-revenue" software businesses. The first half of 2024 saw a number of multi-billion-dollar tech take-privates, despite stock markets reaching record highs powered in large part by tech outperformance.

Growing pressure for exit options

Many of the headwinds on the buy-side are a double-edged sword, with implications for the sell-side. With M&A activity somewhat muted and the IPO markets only just beginning to thaw, sponsors have seen diminished opportunities to exit on attractive terms. Global private equity exits for 2024 are annualising to approximately USD610 billion, off from USD731 billion in 2023 and USD773 billion in 2022, and well below the pandemic high of USD1.7 trillion in 2021. Sponsor-to-sponsor sales also hit a 10-year low in the first half of 2024. This dearth of exit opportunities has led to a meaningful backlog in private equity deal pipelines. Over 30% of portfolio companies have been held for 5-plus years, an increase from approximately 22% in 2021. And private equity firms globally now hold a record 28,000 unsold companies, collectively worth more than USD3 trillion, according to recent reports.

Continuing a trend of the past several years, the secondary market has accordingly remained a popular alternative path to monetisation, with continuation funds accounting for an increasingly sizable share of sponsor-initiated secondary deal volume. The asset class received a major boost from the USD18.3 billion announced sale of SRS Distribution to Home Depot, which took place mere months after Leonard Green rolled a partial stake in the company into a continuation pool. A diversified group of alternative-asset managers have been observed moving capital and fundraising into these areas, continuing to validate them as properly part of the core private equity market.

Everything old is new again – sponsors pooling capital with each other, and with activists

Private equity "club deals," a hallmark of the pre-2008 era, but a relatively uncommon feature in the decade that followed, are another example of the ways in which sponsors have been working harder and digesting more complexity to get deals done in this environment. Major recent examples include the USD13 billion acquisition of eBay-backed Adevinta by a consortium of investors led by Permira and Blackstone; the USD15.5 billion buyout of Truist Insurance led by Stone Point and Clayton, Dubilier & Rice; and Goldman Sachs’s sale of GreenSky to an investor group led by Sixth Street. Some sponsors have expressed reluctance to participate in mega club deals, citing the challenges to exit presented by the muted buy-side appetite and lukewarm reception some PE-backed listings have faced in the public markets. That said, club deals offer sponsors a means of diversification and access to bigger targets, and it is expected they will continue to be a tool used by PE shops in the right situations.

And as in previous years, traditional activists participated in several high-profile club deals, as sponsors showed a continued willingness to partner both with each other and with other classes of investors. Examples include the USD7.1 billion acquisition of Syneos Health by an Elliott-led consortium that included Patient Square Capital and Veritas Capital, and Apollo’s USD5.2 billion acquisition of Arconic, which included a minority investment from Irenic Capital Management.

Deal Financing

Higher rates = higher equity checks; private credit remains a force; syndicated markets make H1 2024 comeback

The sustained high-rate interest environment, and the on-again, off-again HY markets of the last two years, have had a major impact on PE dealmaking. Average leverage levels for new leveraged buyouts (LBOs) declined to 5.9 times in 2023 from 7.1 times in 2022, and the average equity contribution for large LBOs exceeded 50% in 2023, an all-time high.

Direct lenders have come to dominate small- and mid-market PE financings, and as direct lender funds get increasingly larger, their capacity to finance large-scale PE grows as well. In 2023, 86% of loans for LBOs were made by direct lenders (compared with 65% in 2021). The trend continued through the first quarter of 2024, with private credit financing 85% of LBOs, and only 15% of sponsors tapping the syndicated market.

US institutional loan market activity overall reached multi-year highs in the first quarter of 2024, with repricing and refinancing transactions predominating. The bounceback of syndicated markets did create openings for banks to provide leveraged loans in LBO transactions, however. Notable examples include KKR’s acquisition of a 50% stake in healthcare analytics provider Cotiviti (supported by USD5 billion in loans from a bank group led by JPMorgan) and the USD15.5 billion buyout of Truist Insurance mentioned previously (funded by a debt package of over USD9 billion, including more than USD6 billion in BSLs).

In addition to pitching traditional syndicated deals, some banks have begun an "if you can’t beat them, join them" approach to direct lending. In 2023, Wells Fargo announced a strategic relationship with Centerbridge Partners and Société Générale announced a global partnership with Brookfield, while others, including JPMorgan, are reported to have set aside significant amounts of their own capital for direct lending efforts. JPMorgan is also reportedly seeking to buy a private credit firm to augment its USD3.6 trillion asset management arm, and Goldman Sachs has announced that its alternative investments arm has raised more than USD20 billion for direct lending to private equity.

The blurring of lines between "traditional" and alternative lending is expected to continue, as alternative asset managers expand both their reach and their own funding sources, while traditional banks work to win back share through both syndicated deals and their newly-minted direct lending offerings. For sponsors and borrowers, the right financing solution will depend on market conditions and deal specifics. Many PE financing processes today include a "grid process" that involves outreach to both direct lenders and traditional banks – it is anticipated this will very much remain the "new normal."

A sharp-elbowed financing market – debt default activism in the higher rates environment

In response to post-COVID interest rate hikes, acquirers have used creative strategies to keep low-rate debt of target companies in place following an acquisition. But just as a high interest rate environment makes existing low-rate debt more valuable to borrowers, it also makes such debt more of a burden to lenders. Borrowers have resultantly seen a meaningful increase in "debt default activism," with creditors deploying legal arguments and maneuvers to seek to force borrowers to refinance existing low-rate debt on new market-rate terms. The current sharp-elbowed financing markets encourages sponsors structuring corporate transactions that leave low-rate debt in place to build a record with defence in mind and carefully review not only obviously applicable provisions in debt documentation, but also those that might seem like insignificant "boilerplate."

Liability management booms

Sustained higher interest rates and challenging financing markets, coupled with increased sophistication and precedent, have driven a major increase in out-of-court "liability management" transactions (LMTs). Commentators counted 21 liability management transactions in 2023, more than double the previous peak of ten in 2020, and 2024 has shown continued acceleration in the space, with analysts observing at least 29 LMTs in  H1 2024 alone. Debt investors not previously known for aggressive tactics have proved willing and eager to participate in priming transactions (perhaps out of fear of being primed themselves), while sponsors who had previously stayed on the sidelines, facing challenges at their portfolio companies, took the plunge.

Liability management technology also continues to evolve, with "double dip" and "pari plus" transactions emerging last year, offering new pathways for borrowers to parlay their existing debt baskets for additional credit support in return for correspondingly cheaper debt.

In picking the best liability management path for a distressed portfolio company, sponsors should carefully consider not just the upfront transaction analysis, but the likelihood (and cost) of any litigation that follows a disputed transaction. It is critical to be fluent in the evolving case law (for instance, two recent cases in just the last two months, Incora and Robertshaw, will have a heavy impact on transaction structures that involve the issuance of new "add on" debt in order to achieve requisite voting percentages). Some sponsors, weighing these considerations, have concluded that, when available, they would prefer to do "tiered" liability management transactions than "winner take all" transactions. In tiered deals, a lead creditor group receives greater compensation than the rest of the participants, but minority creditors receive an opportunity for a consolation exchange on lesser, though still meaningful, terms – when possible, such structures can provide sponsors with most of the benefits of a liability management transaction, while avoiding detrimental litigation.

In any case, no field of corporate law is evolving faster than liability management. Yesterday’s transaction structure may not be right for today’s deal, and sponsors and their advisors must be flexible and thoughtful.

Funds and Fundraising

Fundraising faces headwinds... while dry powder accumulates

Private equity sponsors have faced a relatively lean fundraising environment since the highs of early 2022, as many institutional investors have slowed their investment pace and shifted their focus toward other asset classes. In a reflection of the weaker fundraising environment, equity contributions from asset managers into new funds increased to an average of 5% from 2% last year, as limited partners putting money in have demanded more "skin in the game" from sponsors – in addition to fee discounts, co-investment rights and the release of capital tied up in previous funds. Yet even as fundraising has remained tight, uncommitted capital has continued to accumulate amid a relative dearth of deals.

While the fundraising environment remains challenging, some bright spots exist. Sovereign wealth funds have played increasingly bigger roles across fund types. And alternative asset managers continue to push into the retail market, with Apollo, Blackstone and KKR, among others, showing billions of inflows in recent quarters from high-net-worth individuals seeking higher-returning investments across investment classes.

Fund-level financing considerations

The elevated interest rate environment has driven NAV loans and margin borrowing to newfound prominence. The NAV financing market, approximately USD100 billion at present, is projected by some commentators to triple in size by 2025. These loans have drawn some hand-wringing from commentators concerned about layers of leverage. However, NAV facilities have appropriate roles in the fund-financing toolkit, for instance by providing capital for follow-on acquisitions at existing portfolio companies while leaving cheap company-level debt structures untouched, and will continue to be a smart and useful tool in the hands of sponsors with mature portfolios.

Regulatory Developments

Antitrust regulators up the ante

Private equity has been a key focus for the US antitrust agencies for several years now, and recent developments suggest that increased scrutiny of the industry will continue. Following calls in recent years from the Department of Justice (DOJ) and the Federal Trade Commission (FTC) for increased antitrust enforcement targeting private equity roll-up strategies, in September 2023 the FTC filed its first lawsuit based on a "serial acquirer" theory against private equity investor Welsh, Carson, Anderson & Stowe. The FTC’s complaint alleged that, beginning in 2012, Welsh Carson directed a "roll-up scheme" to monopolise and reduce competition for anesthesia services in Texas through the acquisition of over a dozen anesthesia practices. The complaint sought unspecified "structural relief" that could include unwinding prior consummated deals, which mostly were small enough not to require filings under the HSR Act.

Although a Texas court recently dismissed Welsh Carson from the FTC’s "serial acquirer" case in May 2024, the FTC and DOJ appear undeterred by the set-back. The same month, the agencies announced a joint public inquiry and request for information into roll-ups across all sectors and industries in the US economy. By soliciting comments directly from customers and other market participants, the agencies hope to learn about transactions that fall below reporting guidelines but may nonetheless raise antitrust concerns.

In further support of this strategy, last year the agencies embarked on an effort to equip themselves with better tools to detect and challenge "roll-up" strategies through formal and informal rulemaking. The agencies announced proposed revisions of the HSR Act notification form that would require notifying parties to disclose acquisitions in the same industry in the ten years prior to the notification, and new Merger Guidelines include a new theory of harm based on "serial acquisitions" and make clear that the competitive effects of private equity roll-ups cannot escape scrutiny "even if no single acquisition on its own" is anticompetitive. Instead, where a transaction is part of a series, the agencies will consider whether the cumulative effect of the trend or strategy of serial acquisitions may result in a violation of the antitrust laws.

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The second half of 2024 holds the potential to reverse more than two years of deal-volume declines, especially if interest rate cuts materialise and valuation expectations are recalibrated. But, as the last several years have shown, the only market feature that is predictable is an element of surprise, particularly in an election year. As in the past, it is expected that sponsors will continue to find innovative wedges to drive new dealmaking and adapt as market conditions inevitably continue to evolve.