While the private equity deal environment continues to be fairly active, a lack of exits remains an issue. The attaches PitchBook article details what the future may hold if the absence of exits continues.
From the article: “Private equity’s problem began with a steep decline in exits in Q1 2022. By the end of March 2023, the total deal value and the number of exits had dropped for three straight quarters. Compared to Q4 2021, when the industry sold off $201.2 billion in companies and assets, US PE exit value in the first quarter of this year was down 72%. Placed into historical context, the recent drop-off is even steeper than what the industry saw during the global financial crisis of 2007–2009.”
The private equity and venture capital markets are much like an assembly line. There are inputs at the start of the line, and outputs at the end of the line. The outputs, in this scenario, are company exits. Those usually take the form of an IPO or a sale to a larger industry strategic.
Like any properly functioning assembly line, if the output exit is blocked, that will cause the inputs to pile up. Eventually the system will break.
In this particular case, the exit was primarily blocked by an aggressive interest rate hike campaign by the Fed. A reasonable person could argue that if the market fears continued aggressive rate hikes, the exits will remain blocked.
However, the market sentiment seems to be changing. While the market continues to price in future Fed rate hikes, the magnitude of those hike expectations has lowered.
Don’t be too surprised if we see exit activity begin to pick up as the year progresses. If this ends up being the case, the private equity industry will breathe a sigh of relief.
© Copyright July 2023. Marc Patterson. All Rights Reserved.