Private Equity Trends and Outlook for 2024

Private equity has undergone significant transformation over the past several years. In the face of continued market volatility and high inflation, private equity firms have had to become more adaptable and resilient, while staying open to emerging trends and technologies.

The ongoing demand for resilience has led to a refocus on value creation and optimization, one that’s been led by GPs playing a more direct role in portfolio management to maximize growth potential. Diversification has been a central tenet in achieving this, with new market expansions and secondary deals gaining a more prominent focus in deal strategies.

Looking ahead, it’s clear that the market will continue to evolve at a rapid pace, emphasizing the clear need for private equity firms to be smarter, more informed, and more data-driven than ever before. The adoption of market intelligence solutions to drive this capability at scale is crucial.

In this article, we’ll explore the following key private equity trends shaping the landscape in 2024 and beyond:

  • GenAI Adoption Surges
  • Value Creation as a Top Priority
  • ESG Focus Shift Toward Infrastructure
  • Working Capital Optimization
  • Retail Market Expansion Grows
  • Private Credit as an Alternative Lending Source
  • Diversity in Secondary Deals
  • Growing PE Consolidation
  • Geopolitics Makes an Impact

Key Takeaways:

  • Technology advances in artificial intelligence are transforming PE investment strategies, both from a process and targeting perspective.
  • ESG remains a top priority for PE investors in 2024, particularly in renewables and sustainable infrastructure.
  • GPs are playing a more hands-on role in driving value creation and optimizing working capital.
  • Private equity is seeing significant focus on retail, private credit, and diverse secondary deals.
  • Geopolitics such as conflicts in the Middle East and Eastern Europe continue to impact private equity markets, presenting both challenges and opportunities investors must navigate.
  • In 2024 and beyond, PE success will be marked by high adaptability, tech adoption, and ability to act quickly in fast-changing markets.

For a look back to 2023, here are the key trends we’ve identified last year that are still affecting the landscape today:

  1. Deal flow has slowed down in the first three quarters of 2022, after the historically brisk deals that marked the tail-end of 2021.
  2. As straight buyouts become harder to come by in a market still experiencing the effects of inflated valuations from last year, PE firms are getting more deals in the form of add-ons, take-privates, and corporate carve-outs.
  3. Data and talent continue to drive a competitive edge in private equity.
  4. Fundraising can be tough because of the slow exit market but established funds will continue to attract funding.
  5. Tech and business services will continue to attract investor interest as companies are looking for ways to offset rising costs and margin squeezes.
  6. Environmental, social, and governance (ESG) considerations now take a critical role in how PE funds are making investments.
  7. Special Purpose Acquisition Companies (SPACs) were increasing in popularity for a time, but took a sharp decline in the latter half of 2021.

Private Equity Trends to Pay Attention to in 2024

2024 is shaping up to be a year characterized by a blend of technological innovation, strategic shifts in investment management priorities, and a heightened focus on sustainable and ethical investing. 

GenAI Adoption Surges

Artificial intelligence (AI) has been a fast-emerging force in every area of business and finance, and private equity is no exception. Today, AI’s role in private equity has extended beyond operational efficiency and is becoming a strategic cornerstone for decision-making, forecasting, and smart investing.

Generative AI in particular is showing potential to transform and accelerate deal activity. GenAI-powered tools can summarize vast amounts of data to help analysts select the right deals more quickly. They can develop alpha-generating resources such as deal sourcing maps and outreach strategies in just minutes, expand narrow or niche lists to include similar acquisition targets, and even help draft correspondence.

This all indicates that deal sourcing and analysis will happen at a greater scale going forward, a trend PE firms must keep up with in order to stay competitive.

Venture capital will also play a directional role in how AI shapes the business landscape going forward. We’ll likely see continued and steady growth in the number of AI startups winning PE funding as genAI alone is expected to grow at a staggering CAGR of 73% through 2027.

McKinsey partner Ilia Bakhtourine summarized unique opportunities for PE firms, such as acquiring leading AI startups and transferring their skills across the portfolio, or even creating AI centers of excellence to transfer those skills as needed.

Value Creation is a Top Priority

Buyout-back exit value dropped to historic lows in 2023—up to a 65% year-over-year decline throughout the first half of the year, according to Bain & Company. Most assets are either nearing or have passed the average five-year timeframe for PE exits.

While there’s optimism that exits will start to see a rebound in 2024, the slowdown has created a shift in focus toward value creation across existing portfolios. This year, GPs will take a more hands-on approach. They’ll look for ways to cut costs, optimize capital structures to drive greater cashflows, and enhance the unique properties of each asset for greater market penetration.

This will no doubt put many PE firms in a stronger position as exit opportunities do make a comeback, creating a robust platform for growth that can deliver consistent returns amidst market changes.

ESG Focus Shifts Toward Infrastructure

Private equity is witnessing a significant shift towards infrastructure investment, a trend largely fueled by legislative catalysts like the Infrastructure Investment and Jobs Act. This act, along with the 2022 Inflation Reduction Act, have incentivized greater investment in ESG infrastructure, a trend expected to continue in 2024.

This push isn’t merely about traditional infrastructure—it’s increasingly about sustainable and green energy projects. Private equity is at the forefront of financing the transition to renewable energy sources, such as solar, wind, and hydroelectric power. These investments are not only environmentally imperative but also offer attractive returns due to the growing demand.

Investors are increasingly attracted to investment-grade projects in sustainable infrastructure due to their lower risk profiles and stable returns.

Notably, increased PE investment is making a real impact in renewable energy adoption. Research from Boston Consulting Group reports that companies early in a PE hold period average 6% renewable energy use, while those two or more years average 18%.

The scope of infrastructure investment also extends to modernizing existing infrastructure. This includes enhancing broadband connectivity, transportation networks, and utility systems. PE firms are leveraging their expertise in project management and capital allocation to steer these large-scale projects.

Moreover, the focus on infrastructure reflects a broader trend in private equity towards investments that offer long-term, stable returns. Infrastructure projects typically have a longer investment horizon and can provide a hedge against inflation, making them an attractive addition to the portfolio mix.

Working Capital Optimization is Key

Another key PE trend for 2024 is the strategic optimization of working capital. This trend is underscored by a shift in focus from relying on low interest rates and multiple expansion to driving value through operational enhancements. As outlined in Morgan Stanley’s 2024 PE Outlook Report, the higher cost of debt is a significant challenge, but not an insurmountable one.

PE firms are placing greater emphasis on developing and executing value creation processes to drive EBITDA and profitability. This involves a meticulous approach to managing and improving cash flow, particularly in small- and mid-cap companies, which are better positioned to benefit from operational improvements and leadership enhancements.

Key strategies include negotiating more favorable entry multiples and leveraging operational improvements to offset the impact of rising financing costs. A targeted increase in EBITDA, as suggested by Morgan Stanley’s analysis, can effectively balance out increased capital expenses.

This trend underscores a move away from financial engineering towards a more hands-on approach in portfolio management. By optimizing working capital, private equity firms aggregate financial data from multiple sources, enabling a comprehensive analysis of their portfolio companies’ fiscal health.

Retail Market Expansion Grows

In 2024, PE firms are increasingly targeting retail investors who are drawn to the resilience of the asset class, the diversification it offers, and its performance compared to public markets.

It’s particularly attractive to high-net-worth individuals and quasi-retail investors. Private equity firms are actively pivoting towards these investor groups, navigating regulatory complexities with innovative approaches. They are increasingly utilizing structures like access funds and feeder structures established by third-party intermediaries to tap into this expanding capital base. This shift is expected to intensify throughout the year.

Private equity firms are also capitalizing on the opportunities presented by registered investment advisor (RIA) portfolio companies. This move reflects the growing significance of retail inflows as a source of new funds.

As part of their strategy to tap into the retail investor base, some PE firms, through their subsidiaries, are developing innovative platforms and financial products tailored for retail investors, providing private equity firms with new channels to reach a broader retail audience. 

Some firms are going even further, considering comprehensive wealth management services that include white-glove offerings, creating a unique value proposition for retail investors.

Increased and ongoing demand in this space has led to a regulatory reform in the United States and in Europe providing greater access for retail investors to private funds, including an expanded definition of “accredited investor” from the SEC.

The current market slowdown in deal activity offers a strategic window for PE firms. By leveraging new technologies and operational efficiencies, they are well-positioned to seize new opportunities when deal activity and the IPO market rebound. In this resurgence, retail investors are set to play a pivotal role, making the retail market expansion a significant trend to watch in private equity for 2024.

Private Credit as an Alternative Lending Source

In 2024, the private equity sector is witnessing a significant shift towards the growth of private credit, a trend that reflects the changing dynamics of the financial markets and investor preferences. This shift is largely driven by the need for alternative lenders, as traditional bank financing becomes more constrained due to higher interest rates and increased market volatility.

The resilience of the financial system, as observed in the previous year, is leading to a unique situation where businesses are increasingly turning to private credit providers. These providers offer more flexible and creative financing solutions compared to traditional banks, making them an attractive option for companies looking to consolidate balance sheets and strengthen their financial positions. 

Moreover, the private credit sector is benefiting from a surge in mergers and acquisitions activity, driven by adjustments in valuation and cost of capital. This is especially relevant in sectors like technology, real estate, and industrials. Private equity firms with significant liquidity reserves, are finding private credit a viable option to fund transactions in a market where traditional lending criteria are now more stringent.

This evolution of private credit shows a clear transition from a niche asset class to a crucial part of diversified investment portfolios. It’s particularly significant for private equity as it offers a broader range of investment opportunities and a buffer against the volatility of traditional markets.

Diversity in Secondary Deals

Secondary deals are diversifying in 2024, with a growing focus on high-quality GP-led transactions and structured secondaries. This trend is reshaping the way investors approach secondary markets, offering more tailored and strategic investment opportunities in specific industries.

The shift towards GP-led transactions is a response to the evolving needs of both investors and fund managers. These transactions are increasingly centered around “trophy assets” in profitable industries with strong projected returns.

Investors are showing a preference for GP-led deals because they often represent a more targeted investment strategy with potentially higher returns. This trend is particularly evident in sectors that have strong fundamentals and growth prospects, like technology, healthcare, and real estate.

The secondary market is seeing a rise in structured secondaries, which are gaining popularity for their ability to offer investors bespoke strategies tailored to specific industries. This flexibility is a significant draw for investors looking for more customized investment solutions that align with their portfolio strategies and risk appetites.

The increasing diversity in secondary deals is indicative of a maturing market where investors are seeking more sophisticated and nuanced investment options. This trend is expected to continue, with secondary transactions becoming a more integral part of PE investment strategies in 2024 and beyond, delivering a blend of risk management and targeted growth opportunities.

Growing Consolidation

In 2024, the private equity industry is experiencing a notable trend towards consolidation, particularly among smaller, monoline managers. This movement is largely driven by increased regulatory costs and a challenging fundraising environment, which are exerting significant pressure on these firms.

The consolidation trend is a response to a fast-evolving PE landscape, where the ability to raise funds has become more complex and competitive. Smaller firms, often with a focus on a single strategy or sector, are finding it increasingly difficult to navigate this environment. Heightened regulatory costs, especially in light of new SEC private fund reforms, add another layer of complexity, making it more challenging for these firms to operate independently.

As a result, these smaller firms are either seeking mergers with larger entities or becoming acquisition targets themselves. This consolidation allows them to leverage the broader resources, networks, and capabilities of larger firms, thereby enhancing their competitive edge in the market. For larger firms, acquiring smaller, specialized managers can provide access to niche markets and specialized investment strategies, enriching their own portfolio offerings.

This trend is expected to continue as the private equity sector adapts to the changing economic and regulatory conditions. The focus is shifting towards creating more robust, diversified firms capable of weathering the complexities of the current financial landscape while capitalizing on synergies and efficiencies that consolidation can bring.

Geopolitics Makes an Impact

Private equity markets are not immune to the ripples caused by ongoing geopolitical events. As J.P. Morgan reports, geopolitics such as the conflict between Russia and Ukraine and tensions in the Middle East, are causing unease among investors, impacting global supply chains and commodity markets.

Private equity investors need to be aware of these dynamics, as they can influence investment decisions and market valuations. While these events pose risks, they also create opportunities, particularly in sectors like energy, commodities, and logistics. Investors may find value in companies that can navigate these challenges or benefit from the resulting market dislocations.

The key for investors is to maintain a balanced approach, leveraging the sector’s long-term perspective to navigate successfully through turbulent events and market conditions.

Private Equity Outlook

Looking at the year ahead, key themes emerge that will characterize the private equity landscape in 2024 and beyond. Digital transformation is undoubtedly at the forefront, marked by the emergence of AI as a central driver of innovation and smart decision-making. Adaptability will also be essential, as firms must be able to adopt, implement, and adjust strategies alongside new tech-driven capabilities.

ESG remains a core focus for investors, and prior impact shown by PE investment in this space over the past few years could indicate more policy and legislative support on the horizon. At the same time, a rise in public accountability and reporting transparency will motivate PE firms to maintain ESG standards in all investments, not just those focused on things like renewables or sustainable infrastructure.

Related Reading: ESG Due Diligence

Value creation and working capital optimization will continue to evolve in the form of GPs taking a more hands-on approach to strategic, operational, and financial improvements to drive returns. In a market where exit opportunities are expected to rebound soon, enhancing growth potential within portfolio companies is crucial.

Shifts toward retail market expansion, private credit, secondary deals, and consolidation opportunities show that PE firms are willing to make significant strategic moves to maximize profitability, address fundraising challenges, and diversify portfolios to achieve long-term resilience in fast-changing markets.

Global private equity markets are also being shaped by a number of macroeconomic factors, such as changing economic policies and shifts in trade dynamics, which influence PE investment strategies and market performance.

Collectively, private equity trends show that agility and adaptability are paramount in 2024. Many PE firms are sitting on substantial dry powder, ready to deploy capital into promising opportunities as the market dynamics evolve.

Those firms with capabilities and willingness to make smart decisions, act quickly, and be first-movers on new trends and opportunities will be positioned to win.

Related Reading: Top 5 Asset Management Trends and Outlook for 2024

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ABOUT THE AUTHOR
Nicole Sheynin
Nicole Sheynin
Content Marketing Specialist

Fueled by empathy-driven storytelling and good coffee, Nicole is a content marketing specialist at AlphaSense. Previously, she has managed her own website/blog and has written guest posts for various other publications.

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