Accordion’s founder and CEO, Nick Leopard, has weighed in on the current state of the Private Equity (PE) market amidst the absence of the much-anticipated recession. Despite predictions of a 2023-2024 recession, factors such as record-low unemployment and surging public markets suggest otherwise. PE stakeholders are now faced with the question of what to do next in a landscape that saw a significant decline in deal value, exit value, and buyouts over the past year.
One key factor driving PE activity is the record-high dry powder available to buyout funds, totaling $1.2 trillion. With a large portion of this capital being over four years old, GPs are motivated to start making deals despite less than ideal conditions. Additionally, stabilizing interest rates have encouraged PE partners to resume deal-making after a period of monetary tightening. Even the more cautious players in the industry are expected to re-enter the market should the Fed decide to cut rates later in the year.
The future of PE will be different from its past, with five specific changes expected to reshape the industry. First and foremost, there will be a greater emphasis on EBITDA as a driver of value, as price multiples have dipped and multiple arbitrage is no longer a viable strategy. This means that sellers must focus on operational value creation strategies to generate organic growth. Additionally, sell-side readiness has become more important, with portfolio companies needing to be exit-ready at all times to take advantage of market opportunities.
Transformational initiatives, such as digitization strategies and finance process modernization, will play a significant role in improving the performance of portfolio companies and unlocking hidden value. Furthermore, effective communication with investors will be crucial for PE firms looking to demonstrate their stewardship of investor capital. LPs are no longer satisfied with anecdotal conversations about portfolio companies and are seeking quantifiable evidence of value creation drivers like working capital improvement and margin expansion.
Finally, a new wave of distressed companies with unsustainable levels of leverage has emerged, presenting a different type of turnaround challenge for PE sponsors. Instead of traditional bankruptcies, sponsors are using transformation tactics to resuscitate these companies by addressing their broken capital structures. Overall, the PE industry is evolving in response to changing market conditions, requiring sponsors to focus on alternative growth strategies and communicate effectively with investors to drive returns in a more scrutinized fundraising environment.
