Deploying Capital: Private capital market outlook

Globally, the macro-economic and market backdrop entering 2024 is more buoyant than a year ago. The US economy navigated the soft landing many were hoping for, while export prices and record levels of immigration have so far supressed concerns of a looming recession in Australia. However, higher interest rates and stubbornly high inflation are creating a difficult environment for private equity to deploy capital and exit portfolio companies.

M&A activity fell to decade-low levels in 2023, with global volumes falling 18% to about $3 trillion, the lowest level since 2013. M&A transactions involving Private Equity were down 27% to $1.1 trillion globally and 58% to A$10 billion in Australia. ASX IPO volumes also suffered with only one IPO over $200 million in 20231.

The combination of a challenging market for exits, higher cost of debt and economic uncertainty have combined to slow down buyout fund raising volumes. The consequences of multi-year reduced deployment and exit volumes may result in a structural change to the private equity landscape in the coming years.

Private credit, on the other hand, benefits from many of the factors that inhibit Private capital market outlook private equity deployment and we expect private credit activity to continue to increase, given the already 16% uptick in fund raising by these funds in 2023. In Australia, private credit accounts for only 9% of total business lending, compared to 91% and 65% in the US and Europe respectively. Capital regulation and complex cost structures will present challenges for banks lending to fast-growing, smaller businesses.

As we look ahead, pent-up demand from CEOs and business leaders to pursue investment strategies will result in a pick-up in M&A activity. New opportunities for private equity players to exit their existing investments are slowly starting to emerge, and private credit offers more flexible financing. If US or European growth accelerates, we will likely see an increase in inbound corporate and private equity M&A, as international buyers target local companies for international expansion. Australia’s desirable security, demographic, and geopolitical profile will further bolster its appeal as an attractive investment destination.

1Source: CapitalIQ data accessed 9 February 2024.