Private equity insights: H1 2024

How did private equity play out?

Funds’ performance has depended upon their ability to draw and deploy the right level of external debt. Funds which have been able to raise bridge loans and equity for transactions have been more active than funds historically dependent on bank financing.

“There are signs market conditions are settling down now, with a new Government in place providing much-needed stability. Inflation is falling and, although still high, rates have peaked, which means valuations are stabilising. Deals are picking up and overall volume looks set to increase in late Q3 and Q4.”

Humza Khan, Director, Head of Private Equity Coverage 

Total UK PE-buyout value and growth capital deal

_{Source: Pitchbook}

Total UK PE-buyout volumes (top 10 industry groups) – including addons

A key talking point across the business landscape in the last few months is how uncertainty around the General Election impacted activity. The actual impact seems to be less than people may have expected, although it's still early days. We knew an election would be called before the end of 2024 and there would be uncertainty around potential tax changes: for example, capital gains tax and carried interest, has subdued the market throughout the year. We’ve seen more addons compared to platform deals, which only picked up in Q2, with funds using M&A to add value to investments. Some deals may have been impacted by the possible reduction to consultancy spend in the  public sector, but the actual calling of the General Election in May didn’t suppress activity any further and the confirmation of a majority Labour Government should mean that these deals will return in the short to medium term. Funds are continuing to look internationally, especially for portfolio growth, with addons across Europe, the US, and the Nordics.

In the last few years we’ve also had uncertainty from geopolitical tensions, the cost of living crisis, and supply chain challenges. These pressures have eased and, whereas at the same point last year availability of debt was holding back deals, lender appetite is increasing.

Private equity powering energy transition

Tech-enabled, ESG, and energy transition are fast-moving spaces and there are now dedicated funds focused on these areas of the market. This attention reflects the global move towards decarbonisation. Ed Milliband, the new Secretary of State for Energy Security and Net Zero, recently confirmed the Government’s commitment to making the UK a "clean energy superpower by 2030". We’ve been very active in the related deals space in H1 and earlier. Recent transactions we’ve advised on include Next Energy and the PlanetMark sale to a private equity-backed trade buyer.

Exit strategies

With a subdued London market not presenting the best timing to pursue an IPO exit, there has been a notable increase in secondary buyouts since the first half of 2023. Midmarket deals were up 44% H1 2024 YoY (H1 2024: 56), which can be attributed to several factors. Attractive sectors and growth markets attract seasoned investors looking to deploy unprecedented levels of dry powder. Portfolio businesses that have undergone professionalisation and have strong management teams and margins also present as more viable and stable investment opportunities.

The lenders’ view

“Throughout 2022 and much of 2023, lenders were caught in a perfect storm: high interest rates made borrowing more expensive, while inflation negatively impacted margins and cash generation, putting strain on many borrowers' ability to service debts; directly impacting bank risk appetite and credit decisions.

H1 2024 has seen a significant reduction in the rate of inflation and, consequently, bank base rates, although analyst consensus estimates at the end of 2023 have proven to be optimistic and the BoE cuts are now assumed to be both more limited and coming later. This improved position, together with lenders’ desire to deploy and better data to support credit decisions, has seen a strong return in lender appetite.

Base rates, and therefore debt service, remain a concern and are directly curtailing leverage and debt quantum, but more lenders are active, with improved confidence and competition between lenders resulting in reduced margins being offered and improvements in other terms such as covenant flexibility.

H1 2024 data from Debtwire shows that European institutional loan market volumes, across all sectors and purpose, were more than triple that for the same period last year and 138% up on H2 2023. While most of this deployment was focused on refinancing and maturity extensions, M&A financing has also increased in volume.

While lender appetite is broadly up across the spectrum of borrowers and products, lenders are seeking out new sponsored transactions, especially for key relationship PE houses and new platform investments.”

 George Fieldhouse, Partner, Head of CFA Debt Advisory

Report from the American market

“US private equity deal activity increased by 12% in the first half of 2024 as compared to the same period in 2023 based on PitchBook data. This was largely driven by a pick-up in activity during Q2 2023 following a slower M&A market that has persisted since late 2022 driven largely by less attractive financing terms and challenging seller valuation expectations. Many of the deals getting done in the first half of 2024 are add-on transactions and premium assets where banks have started providing slightly more favourable terms. Certain sectors remain more active, notably inflation-indexed industries such as many infrastructure sectors. In addition, private equity firms with strong track records have continued with slower but successful fundraising adding to the growing pool of capital that is ready to be invested. Lastly, the US elections in November, as well as any action the U.S. Federal Reserve may take on interest rates, are likely to bring about new opportunities for investment in the second half of 2024.”

Greg Westfall, National Managing Principal, Private Equity, Grant Thornton US

Sector spotlights

PE always chases growth, and with record levels of dry powder to deploy there are significant opportunities ahead. Consumer markets, the most heavily impacted by the cost of living crisis, are still slow. In contrast we’re seeing lots of potential deals and early activity in energy and energy-transition. The Labour Government is unlikely to move us back towards fossil fuels. Traditionally strong sectors, such as healthcare, are robust, with medical devices drawing particular interest, and the TMT market continues to perform strongly, particularly from US investors.H1 2024 sector performance

The B2B products and services sector is the most active in terms of deals done and is growing as a proportion of all deals. Over 2021 and 2022 it averaged 36% of all deals. Since 2022 this share has increased to 41%. On the equivalent period in 2023, volumes were down 9% but grew 2% on H2 2023.

Technology volumes have been recovering since the end of H1 2023, where the market bottomed out at 40% below their recent peak. On the equivalent period in 2023, it has had the strongest growth at 16%. On H2 2023 it grew at 6%. Platform deals have recovered from their H1 2021 low to grow by 87% in H1 2024 YoY, a trend seen also in financial services and healthcare, which grew 60% and 56% respectively. Technology companies also received the most development capital, up 35% on H1 2023.

Apart from a small increase in 2023 H1, B2C volumes have been falling since H2 2021 when B2C deals represented a fifth of all deals done. This has now dropped to around 15%. Financial services deals, which had grown steadily from H1 2021 to H1 2023, have now started falling again. A similar downward trend can be seen in the add-on market, where only healthcare grew, albeit from a relatively small base.

B2B products and services

Total volume

• Total: 296 (-8.9%)
• Platform deals: 72 (-13.3%)
• Addons: 190 (-9.1%)
• Development capital: 36 (+9.1%)

Highest-value deals

B2C products and services

Total volume

• Total: 109 (-14.8%)
• Platform deals: 25 (-26.5%) 
• Addons: 66 (-8.3%)
• Development capital: 18 (-18.2%)

Highest value deals

Financial services

Total volume

• Total: 82 (-16.3%)
• Platform deals: 16 (+60%)
• Addons: 58 (-25.6%)
• Development capital: 8 (+20.0%)

Highest-value deals

Healthcare

Total volume

• Total: 39 (-17.0%)
• Platform deals:14 (+55.6%)
• Addons: 18 (-48.6%)
• Development capital: 7 (+133.3%)
• Entries 21 (+34.8%)

Highest-value deals

Tech

Total volume

• Total: 146 (+15.9%)
• Platform deals: 28 (+86.7%)
• Addons: 87 (-1.1%)
• Development capital: 31 (+34.8%)

Highest-value deals