The private equity market is currently facing liquidity challenges as holding periods for investments are longer than expected. A significant number of global buyout-backed companies have been held for four years or more, resulting in a record high of unrealized values. Limited partners are putting pressure on general partners to return capital, reflecting a sense of urgency in the market.
Private equity sponsors are cautiously optimistic about an increase in activity, but there are challenges due to mismatched valuation expectations between sellers and buyers. While high-quality assets are being sold, the overall market remains slow. To address liquidity pressures, general partners are exploring innovative strategies such as secondary markets and continuation funds to distribute capital to limited partners. Secondary transactions have seen a significant increase in the past year, setting the stage for a record-setting year.
The current operating environment has generally supported strong performance among privately-held companies, with many reporting positive results. However, there is a cautious approach to valuations, as funds are hesitant to align too closely with public market comparables. General partners have implemented mild markdowns to maintain stable valuations, with the expectation of more mark-ups at exit. This balanced approach reflects a strategy to navigate the complexities of the current market landscape.
Fundraising dynamics in the private equity sector are shifting, with larger funds capturing a significant share of capital raised. Funds exceeding USD 5 billion accounted for more than 50% of total capital raised in the first half of 2024. European mega funds have benefited from earlier interest rate cuts and increased their share of global capital raised. Smaller and first-time funds are facing challenges in fundraising, with most capital concentrated in larger funds. This concentration of capital among larger funds highlights the need for innovative strategies to drive returns and create value.
Private equity sponsors are adopting new value creation strategies to meet investor expectations. They are focusing on mid-market companies and implementing buy-and-build strategies by integrating smaller add-on acquisitions. Corporate carve-outs have also gained traction as a viable strategy, providing opportunities for growth when acquiring non-core or underperforming business units from larger organizations.
The venture capital landscape is experiencing a downturn, with reduced fundraising levels compared to previous years. Large, well-known firms are favored by limited partners, with funds exceeding USD 1 billion accounting for a significant portion of all venture funds raised. While there is a decline in venture capital investment, there is still capital flowing to founders, and investment dollars are surpassing levels seen in most decades. However, the pace of mega-deals has slowed, with AI-related themes emerging as potential drivers for future deals.