Kearney's Jan Timmermann on 2024's private equity deals market

21 March 2024 5 min. read
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After a year of “stalemate” saw private equity deals slow dramatically in 2023, technology and consumer trends look set to break the deadlock in the current 12-month term. Jan Timmermann, partner and European lead for PE portfolio operations at Kearney, explains the outlook for the sector in the coming year.

After an economically volatile 2023, what is the PE market going to look like this year?

Significant macroeconomic uncertainty in 2023 caused a stalemate between buyers, who were suffering from higher interest rates, and sellers, who didn’t want to sell at less than the healthy multiples they were seeing in 2019. The result of this wide ‘Bid-Ask Spread’ was a slowdown in exits and fundraising. In 2024, this stalemate can be visualised in the almost $3 trillion in un-exited assets that some reports suggest, which is putting pressure on PE firms to take action to return capital to their Limited Partners.

Kearney's Jan Timmermann on 2024's private equity deals market

Therefore, we expect that funds are going to continue prioritising value creation in their portfolios, assessing portfolio companies based on performance, remaining upside, and outstanding transformative actions. Funds will look to focus on those portfolio companies where there is the greatest upside potential, and to handing distressed portfolio companies with no plausible path to achieving their original investment thesis back to creditors.

Which sectors can we expect a lot of M&A activity in?

Tech and large consumer goods businesses will be of interest to PE firms this year, in part due to the rapid growth of artificial intelligence and also the resilience and adaptability of larger businesses to provide stable cash flows. We also expect to see some pre-deal activity returning in health, industrials and telecommunications.

However, stubborn labour inflation will continue to impact industries which rely heavily on manpower, such as business services and construction.

What are the greatest challenges facing PE firms this year?

One of the issues that private equity players are currently grappling with is how inflation is affecting different parts of their portfolios. Energy costs and labour costs have been the two biggest causes of inflationary pressures in the past few years, but their trajectories are diverging. Unlike energy prices, which have dropped from their extreme highs in 2023, labour inflation has not receded, and is likely to create complications for firms throughout the year. The cost-of-living crisis is no doubt a contributing factor in this, as the day-to-day impact of high inflation strains personal finances and puts pressure on margins across portfolio businesses.

In addition, PE firms are facing a wave of re-financing, adding an extra layer of complexity in this higher interest rate environment. This is the first time many portfolio companies will feel the impact of interest rates which increased in 2022, as many companies had locked in fixed-rate financing with long maturity dates well before rates started to climb.

Will London continue to be a hotspot for private equity investment in Europe?

Absolutely, there is no question that the capital will continue to be a hub for private equity activity, even if certain funds are opening regional branches in France or Germany. There is historic trust in the London market, and this is not something that will dissipate because of a few years of volatility. London is the global centre for professional services and there is a large support network for PE funds.

Equally, as a city of international importance, funds based here will capture flows of money from Europe, the US and Asia. The British Private Equity and Venture Capital Association continues to ensure that private equity plays a role in growth and innovation across the UK, and there are now over 500 active VC and PE funds in the UK, of which over 75% of these are headquartered in London.

What is Kearney’s role within the sector, and how do you see it evolving in the future?

Most private equity firms have deal teams and operational excellence teams; the Kearney PE Portfolio Operations Team focus is very much on the latter. Our main function is to work with these teams to drive a ruthless commitment to EBITDA uplift through end to end, fast paced transformations.

The Covid-19 pandemic, followed by the Russian invasion of Ukraine, have also reinforced our focus on helping PE firms prepare for black swan events. We help firms implement pre-emptive interventions, such as achieving greater visibility on their supply chain, enabling them to quickly adapt their supply chains to fast changing circumstances.

Other areas of expertise include looking at ways PE firms can leverage their scale to increase the buying power of certain services for their portfolio, ultimately seeking discounted goods for the benefit of individual companies.

Moving forward, in line with the current market challenges, we are increasingly assessing: how PE firms can better manage fixed costs in their portfolio companies, especially how to tackle labour cost inflation; streamlining operational processes and systems; near-shoring and off-shoring activities to optimise their operational footprints.

These levers will continue to play a key role in enhancing efficiency and optimising performance within organisations as the market continues to evolve. The ultimate goal is to create leaner, more efficient portfolio operations that allow firms to adapt to changes in today’s environment with agility.