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1、OVER THE LINE DEAL DRIVERS IN TODAYS PE LANDSCAPEP R I V AT E E Q U I T Y W I R EAUGUST 2024SUPPORTED BY:Deal activity forecasts for the rest of the year remain tentative with positive indicators such as narrowing valuation gaps and anticipated interest rate cuts,among others,being offset by intensi

2、fying geopolitical volatility and wider economic concerns.As this tense reality persists,certain features characterise the private equity deal landscape of today.Number one is the continued flight to quality.Our research finds that most deals fall through at the very early stages during research and

3、 origination or due diligence.Only a few assets make it through multiple levels of scrutiny in a risk-off environment and at least at the large-cap end of the market these quality companies are coveted by multiple managers.What results is a highly priced and fiercely competitive deals landscape.This

4、 is far from sustainable,particularly in light of the second defining feature of todays PE industry vast pools of capital either unrealised or undeployed.Bridging solutions to generate liquidity in the short term have grown in popularity as a way to return capital to LPs while waiting for more favou

5、rable exit opportunities but the longer term play for GPs will have to be getting deals over the line.The need of the hour is differentiation:whether in origination strategies through the use of tech and third-party partnerships;in segmentation of the market based on established investment themes;in

6、 the approach and proposition to sellers;or in the longer term value creation thesis.This report digs deeper into all of the above themes,set against the backdrop of the wider conditions affecting the PE deal landscape.O V E RV I E WPRIVATE EQUITY WIRE INSIGHTS REPORT|AUGUST 2024|2CONTENTSEXECUTIVE

7、SUMMARYAFTAB BOSEHEAD OF PRIVATE MARKETS CONTENTKEY FINDINGSSECTION 1MARKET OUTLOOK34SECTION 2STRATEGY SPOTLIGHT12M E T H O D O LO G YThe data presented in this report is based on a survey of 130+private markets fund managers.Data was collected over the course of Q3 2024 from senior leadership and C

8、-suite respondents across North America,Europe,Asia Pacific and other key geographies.Survey analysis is complemented with qualitative interviews with PE leads at leading PE firms and allocator organisations,alongside knowledge and insight aggregated from a range of media,news and research resources

9、.The valuation gap between buyers and sellers remains the biggest blocker to a more vibrant deal environment,and with competition heating up for a select few quality assets at the upper end of the market pricing will likely continue to be a pain point.Other top areas of concern include rising geo-po

10、litical volatility,persistently high interest rates,and the potential of a recession/economic slowdown.K E Y F I N D I N G SPRIVATE EQUITY WIRE INSIGHTS REPORT|AUGUST 2024|3KEY FINDINGS1324Tentative optimismDespite a slower-than-expected year so far,albeit with notable green shoots of recovery,61%of

11、 managers expect deal activity to increase over the next two quarters.The biggest drivers here are intensifying LP demands for divestments and distributions,interest rate cuts,and a semblance of macro-economic stability.Still,over a third(34%)expect activity to remain the same over the next six mont

12、hs.Pricing painStrong undercurrentsThe AI-fuelled rejuvenation of digital transformation across industries,alongside other considerations around cybersecurity,mean the tech sector will likely be the hotspot for deal activity over the next two quarters.Other era-defining trends,such as the energy tra

13、nsition and ageing demographics,put the energy and life sciences sectors in second and third place as deal hotspots,followed by consolidation in financial services.Sourcing strategiesWhile pricing negotiations are the biggest pitfall in the transaction lifecycle,more than half(52%)of firms report mo

14、st of their deals fall through earlier either during research and origination or due diligence.Building third-party partnerships,marketing and business development,overall growth marketing and tech and data analytics are the most popular,and impactful,investments to boost origination efforts.The dea

15、l logjam continues what started out as a year of optimism has proved slower than expected for most involved in the world of private equity(PE).But expectations of an uptick remain persistently high.Indeed,they must,given Bain&Companys much-cited estimates that the global PE industry is holding$3.2tn

16、 in“un-exited”assets,amounting to 28,000 companies in portfolios worldwide.Private Equity Wires Q3 2024 survey of more than 130 managers revealed nearly two-thirds(61%)expect an increase in deal activity in the second half of the year(see Figure 1.1).Michael Gahleitner,a Managing Partner and Co-Head

17、 of Industrial Tech at Triton,says:“If not in the next quarter,then certainly in the next six or nine months we can expect more activity.The industry is sitting on a mountain of dry powder,DPI is close to a ten-year low,and leverage is more readily available.In Europe,the risk premium on the base ra

18、te is about 150 basis points thats lower than the average of the last two decades.”Survey data backs up this assessment.The top three drivers of a more active deal landscape this year according to the majority of managers are:demand for divestments/distributions,interest rate cuts and closely relate

19、d more clarity on the macro-economic landscape(see Figure 1.2).IN THE BALANCEThe world of PE has its say on the deal outlook for coming quarters,and the assets and sectors that will likely drive an uptick in activityS E C T I O N 1:M A R K E T O U T L O O KPRIVATE EQUITY WIRE INSIGHTS REPORT|AUGUST

20、2024|4S E C T I O N 1:M A R K E T O U T L O O KPRIVATE EQUITY WIRE INSIGHTS REPORT|AUGUST 2024|5Source:Private Equity Wire GP Survey Q3 2024But where the macro-economic environment has found stability,the global geo-political backdrop is as volatile as ever ranking as the second biggest blocker to d

21、eals for the remainder of the year(see Figure 1.3).Topping this list is the ongoing valuations gap,and the possibility of a higher-for-longer interest rate environment rounds off the top three though recent indications from the Fed suggest a cut might be coming.TENTATIVE TIMESThe result of these con

22、flicting forces is what many describe as a cautiously optimistic deal environment.Scott Reed,Partner at Boston-based HighVista Strategies who co-leads the firms lower mid-market PE strategy,says:“Expectations were nearly identical at this time last year the widespread assessment was that H2 2023 wou

23、ld be the turning point,which never materialised.“Since then,the same optimism has been carried over from one quarter to the next,and while there has been a degree of improvement in conditions,this has largely been at the margin and deal activity remains sluggish both on the new deal front and on th

24、e exit side.”The biggest challenge remains the bid-ask spread on assets.Many,including Reed,suggest this gap has narrowed this year,which should combine with anticipated rate cuts in the US to grease the wheels to some extent.“At the same time,theres growing unease about the durability of the econom

25、y right now,which may offset the positive indicators and make it Figure 1.1 Deal activity expectations for H2Respondents were asked,In the next two quarters,you expect PE deal activity to:All GPsO V E RV I E WPRIVATE EQUITY WIRE INSIGHT REPORT|FEBRUARY 2023|6KEY FINDINGSDeal hotspotsTop four sectors

26、 that will see the most deal activity in the next two quartersTech,AI and cyberEnergy transition towards renewablesPharma,life sciences and biotechFinancial services consolidation1234harder for PE buyers to underwrite cashflow projections,”says Reed.He adds:“Even on the sell side,despite the need to

27、 boost the flow of distributions,anecdotally weve seen many PE firms hold out for another year with the hope of better conditions rather than selling right now at a lower multiple than the purchase price.”Indeed,intel from the investor,manager and investment banker worlds all suggest that due dilige

28、nce and overall transaction lifecycles are being drawn out,with several pitfalls along the way.Alan Gauld,Senior Investment Director at Patria Private Equity Trust says:“At the start of the year,we were hearing rumours that if all the transactions in the near-term investment banking pipeline were co

29、nverted it would make 2024 the largest year in history for PE,bigger even than 2021.”QUALITY CHECKThe reality has been far removed.What has continued from 2023 and over the course of this year is a flight to quality assets due diligence processes have stretched,and typically it is the highest qualit

30、y prospects that have converted into deals.Gauld says:“Weve seen some PE-backed IPOs this year,but weve also seen a few cancellations,which is symptomatic of the current market.Volumes in the mid-and lower-mid-market have kept up a steady pace throughout but encouragingly we have seen a greater numb

31、er of large cap deals in 2024 S E C T I O N 1:M A R K E T O U T L O O KPRIVATE EQUITY WIRE INSIGHTS REPORT|AUGUST 2024|7Figure 1.2 Drivers for a more active deal landscapeSource:Private Equity Wire GP Survey Q3 2024Respondents were asked,of the following,which factors are contributing most to higher

32、 deal activity?*Respondents could pick multiple optionsO V E RV I E WPRIVATE EQUITY WIRE INSIGHT REPORT|FEBRUARY 2023|8Scott Reed,Partner,HighVista StrategiesTheres growing unease about the durability of the economy right now,which may offset the positive indicators and make it harder for PE buyers

33、to underwrite cashflow projections.“S E C T I O N 1:M A R K E T O U T L O O KPRIVATE EQUITY WIRE INSIGHTS REPORT|AUGUST 2024|9Source:Private Equity Wire GP Survey Q3 2024compared to the prior year.However,the lower quality,tier two or three assets have been slower to trade much of the market has rec

34、ently been competing for high-quality,market-leading businesses.“This has meant that pricing for those high-quality assets has remained relatively high,which somewhat caps the potential upside.There will come a point when that dynamic changes and well start to see a few more value-oriented deals.As

35、interest rates begin to fall,firms will likely gain more confidence and seek pockets of opportunity across the entire market,rather than targeting top companies in the economys most resilient niches.”It is true that investors have flocked to certain sectors amid recent economic turbulence particular

36、ly those with positive underlying indicators.This will continue to be the case.According to our survey,the top three sectors expected to drive deal activity over the next two quarters are:technology(including cybersecurity and AI),the energy transition towards renewables,and pharma and life sciences

37、.In a close fourth is the consolidation of the financial services sector.“Areas such as business-to-business,mission critical software,healthcare technology and insurance brokerage have all been PE hotspots recently,and other business-to-business services are also achieving relatively high multiples

38、,”says Gauld.Transaction numbers will likely climb higher as PE firms begin to look beyond just the top of the pile in each of these segments.Figure 1.3 Main blockers to deal activityRespondents were asked,Of the following,which factors will continue to hinder deal activity?*Respondents could pick m

39、ultiple optionsS E C T I O N 1:M A R K E T O U T L O O KPRIVATE EQUITY WIRE INSIGHTS REPORT|AUGUST 2024|10Figure 1.4 Sectors ripe for deal activitySource:Private Equity Wire GP Survey Q3 2024Respondents were asked,Which of the following sectors/trends could represent a deal hotspot in the next two q

40、uarters?*One thing that will help this along is the gradual elimination of spurious factors affecting business risk fundamentals and cashflow projections.As explained by Gahleitner:“We had a lot of dislocation during the pandemic,mainly because it was difficult to track the historical financials of

41、a company and compare the performance pre-and post-Covid.“During due diligence,it was difficult for PE firms to determine what was really driving movement in the profit and loss statements,and form a full picture of what they were purchasing.Thats largely behind us.”From the macro-economic backdrop

42、to granular transaction details,there appear to be positive indicators for a more lively deal market the question remains of how long it will take for investor sentiment to truly loosen,for the valuations gap to close,for manager risk appetite to build up and,eventually,for the PE floodgates to fina

43、lly burst open.*Respondents could pick multiple optionsKEY TAKEAWAYOpinions are mixed on how deal activity will develop in the next two quarters,but a more competitive and potentially stable environment may drive managers to explore a riskier class of assets.S E C T I O N 1:M A R K E T O U T L O O K

44、PRIVATE EQUITY WIRE INSIGHTS REPORT|AUGUST 2024|11Big Four advisory firm EY reported Q2 2024 to be PEs“strongest quarter in two years”in a July report.The cumulative Q2 2024 deal value,at$196bn,was nearly a 100%jump on the$100bn in Q1 2024 though deal volumes remained relatively muted when compared

45、to the end of last year,and far below the 2021 peaks.The spike in value over volume reiterates the flight to quality thesis a number of high profile assets are changing hands for very high prices in a competitive environment.A spike in volumes would more accurately represent a wider warming of the m

46、arket.In terms of expectations for the next six months:The number of firms expecting a 10-25%spike in deal activity has nearly doubled over the past six months(from 23%in Q4 2023 to 43%in Q2 2024)mirroring the optimism revealed in PEWs Q3 2024 survey.Interestingly,the number of distressed opportunit

47、ies appears to have decreased significantly since the start of the year,while a slight drop is also notable in expectations from the secondaries space.Expectations of a spike in the growth equity or late stage VC stage,meanwhile,have doubled since early 2024.Pulse checkWhat hascontinued from 2023 an

48、d over the course of thisyear is a flight to quality assets“A core problem that many have set out to solve in the past two years has been to generate liquidity in the absence of exits.According to Scott Reed of HighVista Strategies,what has resulted is a wave of creativity in either deploying or dis

49、tributing funds.He says:“Weve seen partial sales to buyers,preferred structures,dividend recap activity and a host of other solutions to bridge the gap and start the distribution machine revving up a welcome move for LPs,who can start deploying capital elsewhere.These solutions effectively add an ex

50、tra step in between,buying time till the transaction mill starts turning again and firms can generate more fulsome liquidity over the next six to 12 months.”Still,the ideal solution for firms is simply to get transactions over the line a task that is rife with pitfalls.Asked about the stage of the t

51、ransaction at which most deals tend to fall through,most firms(34%)predictably reported valuation negotiations to be the biggest pitfall(see Figure 2.1).This was followed by due diligence(29%)and research and origination(23%).NAVIGATING COMPETITIONThe numbers portray a clear narrative.A higher degre

52、e of selectivity is leading firms to reject most prospects at the early stages that is during origination or due diligence.And when a select few assets make it through the funnel,differences over pricing throw a spanner in the works.With many firms facing similar challenges,at least at the upper end

53、 of the market,the result is a flurry of competition for a handful of coveted assets a scenario that is far from sustainable as the risk-off environment persists.What firms need is differentiation either in their origination strategy,so as not to stumble upon the same assets as the mainstream,or in

54、their LAYERS OFDIFFERENTIATIONAs we wait for deal floodgates to open,PE firms give us a deeper understanding of how they have been positioning themselves in a competitive market S E C T I O N 2:S T R AT E GY S P O T L I G H TPRIVATE EQUITY WIRE INSIGHTS REPORT|AUGUST 2024|12Figure 2.1 Most challengi

55、ng stages of the transaction lifecycleSource:Private Equity Wire GP Survey Q3 2024Respondents were asked,At which stage of the transaction lifecycle do the majority of your deals fall through?S E C T I O N 2:S T R AT E GY S P O T L I G H TPRIVATE EQUITY WIRE INSIGHTS REPORT|AUGUST 2024|13approach to

56、 negotiations that can set them apart from fellow suitors.Many are investing in the former capability.The majority of firms in our survey have adapted their sourcing efforts in some way or the other to maximise deal flow in the current environment(see Figure 2.2).The top three:third-party partnershi

57、ps;marketing and business development;and growth monitoring.In a very close fourth place is the use of technology and data analytics.We followed up and asked firms what were the most effective of these strategies yielding the same top three,respectively.Interestingly,the use of tech and data analyti

58、cs was second on the list when it comes to the largest firms those with more than$10bn in AUM and also ranked as the most impactful investment for this bracket of firms,alongside third-party partnerships(see Figure 2.3).But the value gained from tech differs greatly from one firm to the next,dependi

59、ng on how its leveraged(see boxout).KEY DIFFERENTIATORSIn reality,firms tend to use a mix of all of the above strategies,and a variety of others,to give themselves a competitive edge.Triton has been among the more active firms in the European market,making six divestments in 2024 and announcing the

60、acquisition of Dutch Business Services company V&N Group.According to Partner Michael Gahleitner,there are four key differentiators in Tritons approach:“One is technology,but I wouldnt class that as All GPsO V E RV I E WPRIVATE EQUITY WIRE INSIGHT REPORT|FEBRUARY 2023|14KEY FINDINGSHigh scrutiny Sha

61、re of managers reporting most of their deals fall through during research and origination or due diligence52%Figure 2.2 Sourcing strategies to maximise deal flowSource:Private Equity Wire GP Survey Q3 2024Respondents were asked,How are you adapting your sourcing efforts to maximise deal flow in the

62、current environment?*a key differentiator I would assume most of the sophisticated PE firms in the mid and upper market now apply AI,machine learning and data analytics to build their pipeline.The second is relationships,which is crucial.Weve worked a lot with industry experts and people with vast n

63、etworks that can be leveraged for more information.“The third is reputation.Our pipeline is quite non-typical we look for companies that are under their full potential and transact mainly with corporates and families,and in many cases the deal negotiations are prolonged,bilateral,customised interact

64、ions that are viewed more as a partnership than an acquisition.Reputation and trust is critical in this space,and weve been able to cultivate these over time.“And finally,we have focus.For example,industrials is such a broad space.We have to pick our battles and be disciplined about the sub-sectors,

65、segments and pockets of the market in which we operate based on whether they fit within the themes we support.”Another firm that has been in the news for transactions recently is Waterland Private Equity notably its recent acquisition of Lebara Group.The firms UK lead,Partner Wendy McMillan,also hig

66、hlights the need for focus.“Weve oriented our investments around four key themes sustainability,digitalisation and outsourcing,ageing populations,and leisure and wellbeing.This gives us a framework within which to identify the types of business and founder that might have an interest in partnering w

67、ith us.S E C T I O N 2:S T R AT E GY S P O T L I G H TPRIVATE EQUITY WIRE INSIGHTS REPORT|AUGUST 2024|15*Respondents could pick multiple optionsO V E RV I E WPRIVATE EQUITY WIRE INSIGHT REPORT|FEBRUARY 2023|16Michael Gahleitner,Managing Partner and Co-Head of Industrial Tech,Tritonwe strongly believ

68、e in margin expansion to improve the performance of a company to make it more resilient,healthier and more robust.These factors remain under our control.“JOSH GIGLIOVP of Product,SourcescrubSOURCING SOPHISTICATION As green shoots emerge in the world of PE dealmaking,Sourcescrubs VP of Product,Josh G

69、iglio,discusses the evolving role of data solutions in origination.Macro and geopolitical uncertainty,combined with the valuation mismatch and a number of other factors led to a high degree of deal selectivity in recent years.“Figures from H1 2024 reveal an uptick in deal activity compared to last y

70、ear,but there is substantial capital out there chasing a competitive number of deals,”says Sourcescrubs Josh Giglio,pointing at the demand-supply gap for high-quality and,significantly,resilient assets.“Five years ago,sourcing was a key problem to separate the hopes and dreams businesses from those

71、with fundamentally positive indicators.And while this remains a challenge,the sheer volume of data and solutions available to firms has progressed significantly levelling the playing field to an extent.”Scope and searchIndeed,a fifth of firms surveyed by PEW now use tech and data analytics to enhanc

72、e their sourcing strategies,and 14%say this has been their most impactful investment to this end.These platforms can be instrumental in growing pipeline and reaching targets before competitors do.So where is the room for improvement?Giglio outlines three key areas:One is the foundational layer of da

73、ta on the investable universe its volume and quality.“Its important to strike the balance between having a comprehensive dataset in a solution,while also keeping it manageable.”The second relates to integration and intercommunicability of data solutions.“Firms use such a plethora of tools they have

74、a source of truth for companies,a portfolio of upcoming transactions,a system to operationalise the pipeline,an outreach tool,and many others.No one solution has been able to solve the integration problem,but its important the data across these tools is intercommunicable.”And the final piece of the

75、puzzle,Giglio says,is the relevance,or“orientation”of data.Many solutions are positioned as large repositories that can be queried like a search engine.The advancement of LLMs last year only accentuated this tendency,but the answers arent always accurate or relevant.A better tool would create a user

76、 journey for firms,leading them to the specific types of data that are most of interest.In a competitive investment landscape where speed and reliability are of the absolute essence for dealmaking,the ability to trust the quality of data,access and enhance it in a streamlined way,and manipulate it b

77、ased on unique preferences are all critical functionalities.New arenasThe iteration and evolution of data solutions in itself has created new challenges for firms,Giglio says.“Most managers can now unearth quality assets the focus is on how to find the best angle into a deal,and strategically chart

78、out a path to exit.“The entire cycle includes a lens on:outreach strategies,the right communication to illustrate your sector and sub-sector expertise,in-person events and conferences that can facilitate meetings withthe right kind of companies,and subsequently information on making a successful exi

79、t the holy grail for any asset manager.”“As the competitive landscape evolves,so too will the role of data solutions in driving this level of sophistication,”he concludes.S E C T I O N 2:S T R AT E GY S P O T L I G H TPRIVATE EQUITY WIRE INSIGHTS REPORT|AUGUST 2024|17A better tool would create a use

80、r journey for firms,leading them to the specific types of data that aremost of interest“Many of the deals we do come from direct reachouts to business owners,to find a way in which we can collaboratively build a journey that includes a buy-and-build proposition.We certainly use technology to aid our

81、 sourcing efforts,but theres no substitute for the human engagement that allows both sides to determine if a partnership would be suitable”.VALUE FIRSTA critical consideration highlighted by both Triton and Waterland is the focus on a value creation plan at the point of contact.McMillan says:“Right

82、from the beginning,its possible to bring sellers onto the same page by thinking about the value of a business in all environments with extra diligence on whether the price is fair or not.”Gahleitner describes Triton as an“all-weather investor”,highlighting its“intention to make money,no matter the e

83、nvironment”.He says:“What this requires is for us to buy a company and underwrite a value creation thesis that is largely under our control.The PE industry in recent years has digressed from this thesis,but we strongly believe in margin expansion to improve the performance of a company to make it mo

84、re resilient,healthier and more robust.These factors remain under our control.”In a mature PE market,where financial engineering and multiple expansion have taken centre stage over many years,Gahleitner positions this as a USP one that appeals to sellers and investors alike.S E C T I O N 2:S T R AT

85、E GY S P O T L I G H TPRIVATE EQUITY WIRE INSIGHTS REPORT|AUGUST 2024|18Figure 2.3 Most impactful strategies for deal sourcingSource:Private Equity Wire GP Survey Q3 2024Respondents were asked,Which of these investments have made the biggest impact?KEY TAKEAWAYTechnology is levelling the playing fie

86、ld,and firms are differentiating based on investment themes,sector segmentation and their approach to value creationAll GPs$10bn+AUMO V E RV I E WPublished by:Global Fund Media,Fox Court,14 Grays Inn Rd,London,WC1X 8HN Copyright 2024 Global Fund Media Ltd.All rights reserved.No part of this publicat

87、ion may be reproduced,stored in a retrieval system,or transmitted,in any form or by any means,electronic,mechanical,photocopying,recording or otherwise,without the prior permission of the publisher.Investment Warning:The information provided in this publication should not form the sole basis of any

88、investment decision.No investment decisionshould be made in relation to any of the information provided other than on the advice of a professional financial advisor.Past performance is noguarantee of future results.The value and income derived from investments can go down as well as up.P R I V AT E E Q U I T Y W I R ECONTRIBUTORS:Aftab BoseHead of Private Markets CJohnathan GlennHead of DFOR SPONSORSHIP&COMMERCIAL ENQUIRIES: