The private equity industry is constantly evolving, and with record levels of capital and a competitive deal flow, 2024 is shaping up to be no different.
Here are some of the top private equity trends that we expect to see in the coming year.
Eight Private Equity Trends to Know
1. Increased Competition for Deals
The private equity industry will continue to be highly competitive in 2024, particularly when it comes to finding deals.
This private equity trend is due to a combination of factors, such as:
- large amount of dry powder (uninvested capital)
- increased demand for yield
- decreased purchase price multiples
- the growing number of participants in the market
- growing impatience from limited partners for longer-than-average hold periods
- the trend towards large buyouts
As a result of this intense competition, private equity firms are under pressure to differentiate themselves and find creative ways to generate value, such as developing a strong track record of generating returns or building a strong network of relationships with key industry players.
2. Growing Interest in Niche Sectors
As competition for deals in traditional sectors heats up and as consumer behavior shifts, private equity firms are expected to look to niche sectors for opportunities.
Niche sectors tend to be less crowded, meaning that private equity firms may have a better chance of finding unique investment opportunities and achieving strong returns.
And by focusing on these niche sectors, private equity firms can also reduce their exposure to broader market risks and increase the diversification of their portfolios.
With an aging population, increased healthcare costs and ongoing advancements in medical technology, sectors like clean energy, healthcare technology, dental service organizations, home services, specialty physician practices, need-it-now businesses and e-commerce logistics are likely to see increased interest from private equity firms in 2024.
Creativity in finding value-add opportunities may also include identifying niche manufacturing businesses that have a strong market position and a clear path to growth, and then working with management teams to improve operations, expand into new markets and drive innovation.
3.Focus on ESG and on Associated Costs
Environmental, social and governance (ESG) considerationsare becoming increasingly important to both investors and the companies in which private equity firms invest.
Private equity firms are expected to continue integrating ESG considerations (such as diversity, equity, inclusion, sustainability and cybersecurity) into their investment processes. With the global sweep of ESG-related regulations, ESG has become both a strategic imperative and a legal necessity for General Partners.
Firms are likely to move toward outsourcing routine ESG monitoring and reporting to manage costs effectively. Additionally, there may be market consolidation among ESG service providers, and private equity firms will start scrutinizing ESG costs more closely.
4. More Direct Investment in Public Companies
Activist investors have been using private equity strategies for years to invest in publicly traded companies, and we expect to see more traditional private equity firms follow suit in 2024.
This private equity trend is being driven by the growing number of publicly traded companies that are undervalued or underperforming.
With a direct investment in public companies, firms can use their expertise and resources to drive operational improvements and turn around underperforming assets.
5. Greater Use of Technology
The pandemic accelerated the use of technology in the private equity industry, and we expect this private equity trend to continue in 2024.
From virtual due diligence to the use of AI-driven tools to identify potential investment opportunities, technology is becoming an increasingly important part of the private equity process.
The increased use of data and analytics will also play a crucial role in helping firms make informed investment decisions.
6. Increased Activity in Emerging Markets
Private equity firms are looking to tap into the growth potential of emerging markets, such as Asia and Latin America.
We expect to see increased activity in these regions, as private equity firms seek to capitalize on the growth potential of these markets.
Additionally, firms may explore new geographies and sectors, such as frontier markets, to find untapped opportunities and diversify their portfolios.
7. Rise of Alternative Lending and Debt-to-Equity Splits
Due to the high interest rate environment, the market has experienced increased activity in both bridge loans and mezzanine lending over the last few years, and this trend is expected to continue in 2024.
The industry is also seeing a shift in the debt/equity split on deals where investors are gaming the return economics by putting in more equity up front to counteract some of these macro-economic trends.
Private equity firms are increasingly turning to alternative lending and more balanced debt/equity splits as a way to generate returns and diversify their portfolios.
8. More Creative and Flexible Deal Structuring
Private equity firms are also expected to be increasingly creative in their deal structuring and value-add opportunities in 2024.
Firms may look to employ more flexible deal structures, such as joint ventures, minority investments and rolling funds, to help mitigate risk and find new ways to create value.
Learn More About How You Can Respond to This Year’s Anticipated Private Equity Trends
The major takeaway that these private equity trends point to is that 2024 will bring increased creativity to generate value to investors. Overall, the projected private equity trends for 2024 demonstrate a focus on adaptability and sustainability.
As the industry continues to evolve, it will be interesting to see how these private equity trends play out and how firms will adjust their strategies to stay ahead of the curve. The private equity industry is a competitive one, and the firms that are able to successfully navigate these trends will be well-positioned for success in the years to come.
If you have questions about today’s current climate or anticipated private equity trends, Warren Averett’s advisors can help. Contact your Warren Averett advisor directly, orask a member of our team to reach out to you.
This article was originally published on February 7, 2023 and most recently updated on January 30, 2024
Industry Private Equity
Topic Business Strategy, Value Creation
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