Private equity payouts fell 50% short in 2024

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Private equity funds cashed out only half the value of the investments they typically sell in 2024, the third year in a row of lower payouts to investors due to a deal drought.

Buyout houses typically sell 20 percent of their investments in any given year, but industry executives forecast that cash payouts for the year will be about half that.

Cambridge Associates, a leading adviser to large institutions on their private equity investments, estimates that funds have underpaid their investors by about $400 billion over the past three years compared to the historical average.

The data underscores growing pressure on companies to find ways to return cash to investors, including further exits in the year ahead.

Firms have struggled to trade at attractive valuations through early 2022, when rising interest rates drive up financing costs and lower corporate valuations.

Dealmakers and their advisers expect merger and acquisition activity to accelerate in 2025, potentially helping the industry with what consultants Bain & Co. say has a “large backlog” of $3 trillion that needs to be sold in the coming years.

Several major public offerings, including food transportation giant Lineage Logistics, aviation equipment specialist Standard Aero and dermatology group Galderma, have given private equity executives the confidence to take companies public this year, while the election of Donald Trump has added to Wall Street’s euphoria.

But Andrea Auerbach, global head of private investment at Cambridge Associates, warned that the industry’s problems could take years to work out.

“There is an expectation that the wheels of the exit market will start turning. But it’s not over in a year, it’s going to take years,” Auerbach said.

Private equity firms have used novel strategies to return cash to investors when holdings have proven difficult to sell.

They have increasingly used so-called succession funds — where one fund sells stakes in one or more portfolio companies to another fund that manages another firm — to engineer exits.

Jefferies forecasts there will be $58 billion in continuation fund deals in 2024, representing a record 14 percent of all private equity exits. Such funds made up just 5 percent of all exits in the boom year of 2021, Jefferies found.

But some private equity investors are skeptical that the industry will be able to sell assets at prices close to the fund’s current valuation.

“You have huge amounts of capital invested on assumptions that are no longer valid,” one major industry investor told the Financial Times.

They warned that more than a record $1tn of purchases were due in 2021, just before interest rates rose, and that many deals were carried out at overly optimistic valuations on the firms’ books.

Goldman Sachs recently noted in a report that private equity asset sales, which were historically done at at least a 10 percent premium to the fund’s intrinsic valuation, have been done at a 10-15 percent discount in recent years.

“[Private] Equities in general are still over-marketed, leading to a situation where assets are still locked in,” said Michael Brandmeier of Goldman Sachs Asset Management in the report.