The foundations: fundraising, deal activity, exits

A shifting landscape: a tough year in fundraising; PE takes public companies private; AI’s disruptive potential

• There are marked geographic differences here. For North America-focused funds, fundraising declined just 2 percent from the record set in 2021. Despite the year-over-year decline, 2022 was the second-highest year on record for North America PE fundraising.
• Fundraising for Europe- and Asia-focused funds fell dramatically. European PE funds raised $93 billion, a 32 percent year-over-year decline and the lowest total since 2017.
• In Asia, fundraising fell 49 percent to $74 billion, the lowest total since 2013, mostly due to China-focused fundraising. 2017 was a peak year, when China-focused funds raised $208 billion, dropping to $34 billion in 2022. At its peak, China represented more than 85 percent of PE fundraising in Asia, falling to 46 percent in 2022.
• Across the rest of the world, accounting for just 7 percent of the global total, fundraising grew 12 percent year-over-year, primarily driven by several large Australia and Australia-Pacific funds.
• Venture funds worldwide dropped by nearly half in 2023, raising a combined $58.1bn in H1 2023, down from $100bn in the same period of 2022 and 2021. Volume has slumped, with 255 funds closed in H1 compared with 846 in 2022 and 1,322 in 2021. LPs are inhibited by program liquidity, with capital yet to be called from previously raised funds being rolled into 2024.
• Geopolitics is not helping: the global economy has been in choppy waters due to tension between two of the world’s biggest venture markets, the US and China. The resulting shifts in cross-border globalisation has prompted more tech companies to diversify their exposure from China into India.
• Fundraising for early-stage funds continues, with innovation such as climate tech and AI encouraging investors, as well as lower valuations.
• For private equity, a rise in tech dealmaking is gaining traction, particularly in taking public companies private. Private equity led 57 percent of public-to-private tech deals in the first half of 2023, almost double their share of public-to-private tech deals in 2020, 2021 and 2022.
• It’s a broad trend. In H1 2022, private equity firms spent more than $220 billion on public-to-private transactions globally; a 40 percent increase year-on-year.
• Public tech companies had to significantly reduce headcount to cope with economic uncertainty in early 2023. Rebuilding by selling to a financial sponsor is increasingly attractive to avoid the pressure of delivering returns in a difficult market.
• Consolidation is creating attractive opportunities, particularly in cloud-based software driven by AI’s disruptive potential. Taking a company private and merging it with a company that has a complimentary portfolio creates operational synergies and vertical integration. This enhances market position and sustainability.
• Private equity firms are the most active tech M&A buyers in the near- and medium-term, partnering with venture capital funds to help scale and monetise private equity’s future assets.
• Deal volume is picking up, with 93 deals of $100m+ in Q3 2023, 63 percent up on Q1 2023. While take-privates dominated H1 2023, deal types are broadening, with corporate parents divesting non-core or orphan assets. Carve-outs can be a competitive differentiator for PE firms, with the largest leveraging their scale and expertise to drive value.
• A survey by EY shows that among PE investors of different geographies and fund size, two-thirds expect more buoyant deal activity to continue through Q2 2024; technology is the primary focus, due to its relative resilience and integration across different sectors.
• Early-stage activity has been less impacted than late-stage markets: half of the VC deals in Q2 2023 were seed and Series A, raising $7.2bn, representing a quarter of VC investment.
• Exit markets are showing signs of recovery, with 68 exits through M&A in Q3 2023, up from 47 in Q1 2023. However, PE professionals show little sign of consensus, despite moderating inflation, static interest rates and improving confidence in the IPO markets.
• Read more on the topic: 
  EY private equity pulse: Q3 2023
  Venture Capital Journal
  Alvarez and Marsal Insights: the rise of public to private transactions
  Morgan Stanley: the rise of private equity in tech M&A
  Financial Times: private-to-public-to-private phenomenon
  EY VC investment remains slow
  Bain: Global VC Outlook
  Boyden blog on IPEM 2023

 

"The story in early 2023 centered on the Silicon Valley Bank failure and its repercussions on fundraising. As the year concludes, it becomes evident that China's impact has a more enduring effect on Asian fundraising. The post-COVID downturn in China, combined with the push for non-Chinese suppliers, has resulted in a depletion of fundraising activities related to China. Looking ahead to 2024, the growth in India and other regions may contribute to a resurgence in those markets. Additionally, the electric vehicle (EV) and semiconductor sectors in China could also play a role in driving a rebound." 

- William J. Farrell
APAC Regional Practice Leader, Private Equity & Venture Capital Practice
Managing Partner, Taiwan and South Korea

 

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Retail investors: the next great growth engine

Poor equity performance makes alternative investments attractive; PE products and strategy increasingly tailored to retail investors; private capital is creating a new ecosystem

• Private equity is structuring products to attract wealthy individual investors, enticed by better returns than public equity and debt, and new diversification options.
• In terms of strategy, diversification and cashflow are key drivers for retail investors.  Diversification reduces the risk of concentration, and defensive sectors are attractive such as software and technology, food & beverage and healthcare. With major outlays to be met, such as property and school fees, companies with strong track records and the ability to generate cashflow have the greatest appeal regarding deal selection and investor appetite.
• Despite holding roughly 50 percent of all global wealth ($275-295 trillion of global AUM), individual investors hold a much smaller share of private capital (16 percent of alternative investment funds).
• This is not without challenge. Large groups of investors have very different liquidity expectations than the institutional investors that PE firms are used to. “Experience says the industry has yet to really crack the code on retail,” says Bain.
• Retail capital is expected to grow quickly, but to meet industry growth aspirations it will have to grow even faster. Bain predicts institutional capital allocated to alternative investments will grow 8 percent annually over the next decade, while individual wealth invested in alternatives is expected to grow 12 percent annually. Together, they would support a vastly insufficient 9 percent annual growth in UAM through 2032.
• Access to retail capital has therefore become a high priority for the industry’s largest PE funds. Blackstone sees potential to expand retail capital from $200 billion to $500 billion; KKR expects 30-50 percent of new capital raised to come from private wealth; and Apollo seeks to raise $50 billion in retail capital from 2022 through 2026.
• Will the next tier follow suit? That depends on funding strategy and objectives.
• Increased access to private equity is attractive to individuals and their advisors. Private equity’s returns have been higher (14% globally over the last 25 years, vs. 7% for the MSCI World Index) and true diversification in the public markets is harder to achieve.
• Channel partners and digital platforms see new fee opportunities by mixing in private assets. This is spawning a new ecosystem of intermediaries creating channel partnerships to reach individuals through an evolving distribution and marketing infrastructure; also, to educate advisers and individual investors on alternative assets.
• Read more on the topic: 
  Bain & Company report
  Aztec Group: the rise of private credit

 

"In 2023, we have witnessed the lowest private capital fundraising in decades, prompting General Partners (GPs) to question their traditional approaches. One way GPs are responding to the market change is by expanding their focus to non-institutional investors, such as High Net Worth Individuals (HNWIs) and family offices, as targets for new capital. Private equity firms are scaling up their investor relations teams, and some are exploring relationships with banks and private placement firms to access new clients globally. Keeping this in mind, Know Your Customer (KYC) and due diligence capabilities within GPs will also need to be addressed in the selection and onboarding of new retail clients."

- Nessrine Salah
Managing Partner, UAE

 

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Digitalisation: new levers for value creation

Digitalisation drives new business models; cloud–data anlaysis–predictive modelling deliver stronger revenue streams; GenAI injects speed, adaptability and scalability

• Digitalisation has become a prolific and powerful lever for value-creation. “We have a view that there are no companies today that are not digital enterprises in one way or another,” says Seth Brody, partner and global head of operational excellence at Apax Partners.
• Digitalisation continues to revolutionise business models across the corporate landscape; while PE firms push portcos to generate value from the digital customer experience, digitalisation is enabling product-based companies (such as software companies, auto and home appliance manufacturers) to transition to a service-based delivery. This enables predictable, repeatable revenue streams through upgrades and subscription services.
• Other business models enabled by technology and attracting the attention of private equity include freemium, marketplace, subscription and aggregators.
• Apax has invested over $10 million in its own proprietary analytics platform and toolkit as a result.
• According to AlixPartners, 52 percent of PE firms want portfolio companies to use tech to increase productivity and reduce costs. 35 percent are encouraging portfolio companies to employ tech that aids customer acquisition.
• Ardian is institutionalising how they deploy data in their business. “Data analysis is a fundamental skill in asset management and a strategic way to create value,” says Christopher Sand, a Managing Director on Ardian’s buyout team.
• Cloud migration is key. PE firms are encouraging portcos to develop advanced cloud-based digital capabilities to achieve digital transformation and defend against fluctuating economic conditions. Best practice includes having a defined role for leading a cloud transformation, and running IT processes virtually on cloud while implementing a traditional cloud migration.
• Cloud-based dashboards enable advanced data analytics, such as predictive modelling, that supercharge a company through operations to exit. A potential shift in strategy can be analysed and provided instantly to decision-makers.
• Being on the cloud enables the integration of GenAI into the business. Digitisation is currently dominated by the integration of AI and ChatGPT tools to deliver efficiency, productivity and help drive growth. All companies have key processes that can be automated or augmented by GenAI.
• GenAI delivers exponential value, providing unique benefits of adaptability and scalability. A single GenAI model can quickly be scaled to many users in a variety of functions across the organisation.
• Companies with insufficient digital maturity can still leverage GenAI to unlock value. For instance, “migrating all of a company’s departments to a single data lake on the cloud, then adding a dashboard and predictive analytics may unlock digital value creation opportunities that can be improved upon by adding GenAI afterwards,” explains pwc.
• Read more on the topic:
  Private Equity International – Operational Excellence 2023
  pwc: unlock value with generative AI: a guide for PE portfolio companies
  Forbes: impact of digital transformation on business models

 

"At the heart of a successful portfolio company, there will always be a genuine and outstanding business idea and approach to the market. However, the challenging environment we are currently facing underscores the importance of focusing on profitability, aiming to strike a balance between growth and sustainable performance. Remaining vigilant and aware of digital innovation, a smart and pragmatic use of state-of-the-art digital tools and infrastructure will increase competitiveness, trim costs, and drive profitability. Securing executive support and building talent in the areas of analytics, automation, and AI, in general, will differentiate the good from the great investments, particularly in the next growth period ahead of us."

- Andreas Landgrebe
Global Sector Leader, Digital Transformation Leadership
Managing Partner, Austria, Romania and Slovenia

 

 

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