The development and maturing of Private Equity (PE) is perfectly illustrated by the changing shape of investment capital markets over the past two decades. Data from PitchBook, the investment market financial data specialists, show the relative movements between private capital investment and listed equity markets:
- There were 9,958 PE-backed companies and 6,452 growth-backed businesses in 2021, compared to fewer than 3,000 for these two areas combined in 2000, a fivefold increase.
- There were 4,805 NYSE and Nasdaq-listed US domestic companies in 2021, down a third on the 7,000 quoted entities on these markets in 2000.
The private equity market in 2023
Fewer PE deals were done in 2023, despite healthy levels of capital being available. The suggestion is that the sharp rise in interest rates disturbed valuations, making it harder for buyers and sellers to agree on price. There was also disruption as mainstream banks pulled back from leveraged buyouts, leaving private credit as the principal source of funding to finance such deals.
Private equity groups struggled to attract investors into long-term lock up funds charging high management fees. Including venture capital, the industry raised only $803bn last year, the lowest amount since 2017.
The ‘deal-by-deal’ trend
Private equity managers are sitting on record levels of ‘dry powder’ uninvested client funds, estimated currently to be at around $4tn. Contrary to expectations in this scenario, 2023 saw a record $31bn deployed via ‘deal-by-deal’ transactions through capital raised for specific investments rather than taken from general, longer term funds. According to the PE advisory firm, Triago, this was five times the amount raised and invested by this route in 2019. This one-off funding tactic supported the acquisition of more than 700 companies, double the total from five years earlier.
The rationale behind this trend is obvious for investors: they can see more clearly how their investment is deployed than in traditional PE funds, their money can be returned more quickly and management fees tend to be lower. For some private equity managers, it is a quicker route to building relationships and establishing reputations for those looking to strike out on their own.
Focus sectors for private equity investment
Observers could be forgiven for thinking that AI is the only investment game in town, especially after the chip designer and manufacturer Nvidia recently broke the all-time record for a single day’s capital value gain. After taking two decades to reach a market valuation of $1tn, that has doubled to $2tn in just nine months.
There is understandable focus on technology opportunities, as the entire commercial and professional world scrambles not to be left behind by more nimble competitors, quicker to take advantage of not only AI, but machine learning and advanced cloud-based solutions.
Healthcare is another sector seeing strong investor interest as here too technology enables medical solutions hardly dreamt of even a few years ago and as the escalating demand for treatment and care overwhelms the existing limited capacity of the industry.
Private equity as a key business rescue tool
It is not just the high profile intervention by private equity players as white knights riding to the rescue of seriously distressed businesses threatened by or actually undergoing formal insolvency processes that underwrites the survival of businesses.
PE investment can be the means of rescuing businesses from potentially problematic issues at many stages of their life cycles. Just a few examples out of many include:
- Providing seed capital for start-ups to help great ideas avoid never coming to fruition.
- Funding businesses through growing pains.
- Bringing financial discipline to young companies.
- Allowing growing businesses to be transferred at the right time to more experienced management and ownership more capable of taking them to the next level.
- Providing replacement resources when temporary commercial mishaps have drained fixed and working capital.
- Helping smaller businesses win through against bigger and better-resourced competitors.
- Acting as mentors to guide inexperienced managers in optimising outcomes.
Finding the right private equity partner
Private equity houses come in all sizes, levels of expertise and strategic objectives. No matter what the problem is that is calling for a PE solution, the help and guidance of an experienced independent adviser with in-depth knowledge of this field is essential if existing owners and managers are to find the answers that suit their agenda.
How we can help
We have extensive experience assisting business owners and directors on funding and investment options, and we will always work with you to find the best solution for you and your business.
One of our Partners would be more than happy to have a non-obligatory confidential chat with you. We can be contacted at rescue@opusllp.com or call us on 0203 995 6380 and we will arrange for a call with one of our Partners.