Why Capital investment payments were 50% lower in 2024?

Buyout houses typically sell 20 percent of their investments in any given year, but industry leaders predict that the year’s cash payouts would be about half that figure.

Cambridge Associates, a leading adviser to large institutions in private equity, estimated that the funds had fallen short of paying investors about $400 billion over the past three years, compared with historical averages.

The data highlights growing pressure on companies to find ways to return money to investors, including by divesting more investments in the coming year.

Companies have struggled to close deals at attractive prices since early 2022, when rising interest rates caused financing costs to rise and corporate valuations to fall.

Dealmakers and their advisers expect mergers and acquisitions to accelerate in 2025, which could help the industry survive what consulting firm Bain & Co. has called a « steep $3 billion backlog » of aging stores that must be sold in the coming years.

Several major public offerings this year, including food delivery giant Lineage Logistics, aerospace equipment specialist Standard Aero and dermatology group Galderma, have given venture capitalists the confidence to take companies public, while the election of Donald Trump has added to Wall Street’s exuberance.

But Andrea Auerbach, global head of private equity at Cambridge Associates, warned that the industry’s problems could take years to work through.

« We expect the wheels of the exit market to start turning. But it’s not going to end in one year, it’s going to take a couple of years,” Auerbach said.

Private equity firms have used new tactics to return money to investors, while selling stakes has proven difficult.

They have increasingly used so-called spin-off funds — where one fund sells its stake in one or more target companies to another fund managed by the company — to plan exits.

Jefferies predicts that in 2024 there will be $58 billion worth of ongoing fund deals, a record 14 percent of all private equity investments. Such funds accounted for just 5 percent of all exits during the 2021 boom, Jefferies found.

However, some private equity investors doubt that the industry will be able to sell its assets at prices close to the funds’ current valuations.

« You have a huge amount of capital invested in assumptions that are no longer valid, » a major industrial investor told the Financial Times.

They warned that in 2021, just before interest rates rise, a record $1 billion in purchases were made, and many deals are being done at overly optimistic values ​​on the companies’ books.

Goldman Sachs recently noted in a report that private equity sales, which have historically been at a premium of at least 10 percent to the funds’ internal valuations, have been done at a discount of 10 to 15 percent in recent years.

« (Private) capital is generally still oversubscribed, leading to this situation where assets are still stuck, » said Goldman Sachs Asset Management’s Michael Brandmeyer in a report.