The Private Markets Update highlights key developments emerging from private markets across Europe, the UK and the United States, exploring the cross-border issues that matter to investors and sponsors in alternative assets.
In this edition, we examine developments in the markets over the first half of 2024, and highlight some of the key issues facing investors as we move into the second half of the year.
PRIVATE MARKETS FOREWORD: THE START OF A LOT MORE
This year began with a lot of expectation. There was an expectation (and hope) that interest rate reductions would be forthcoming (along with other macro softening), that some of the challenges underpinning reduced merger and acquisition (M&A) volumes would fall away, that financing markets would become more accessible, and that political uncertainty would wane and a period of stability would underscore a strong return to growth.
Any period filled with such expectation attracts both optimism and an equal dose of pessimism. If markets are hot, pessimists will compare them to the overheating of 2021. Optimists, on the other hand, will argue that while 2023 saw green shoots of recovery, 2024 has started with fruit.
What do we see in our day-to-day practice? Macroeconomic data has undoubtedly improved. Whether within the Federal Reserve or the Bank of England (BoE), there is a growing expectation that rates will soon be reduced. At the BoE's last Monetary Policy Committee meeting, one vote already moved to reduce rates. UK inflation is at its lowest in three years at 2.3%, outpacing the US equivalent at 3.4%. The end of May even saw some US retailers cutting prices to pre-pandemic levels to offset the effects of recent increases, signaling that not only do policymakers have a solution for inflation but so do large corporates.
As macroeconomic indicators have stabilized, we have witnessed a subsequent increase in M&A volumes. The first quarter of 2024 saw a 36% increase in global deal value and, anecdotally, CEOs are more regularly discussing plans to make acquisitions and divestments. This suggests that valuation expectation differentials have softened and that both sellers and buyers are more willing to transact.
The 20% increase on US M&A deal volume at the start of 2024 (following a 17% contraction in 2023) suggests a return to near pre-pandemic levels, lagging by less than 5%. On the private equity side, signs indicate a rebound of 16% in 2024, contrasting the 15% contraction in 2023. While this is behind the peak seen in 2021, it represents a higher pace of growth than the 9% annual average from 2010 to 2019.
This brings us to the importance of 2021 as a barometer for activity. 2021 is widely regarded as the most active period in recent times. Many will recall the "why is it like this" dynamic that pervaded deals that year. If we use 2021 as a benchmark for deal activity, we are likely to be despondent about coming years. If comparing to pre-pandemic periods and accepting that debt, the facilitator of so many transactions, is no longer almost free, then the comparison is a far more appropriate one – and one that shows a story of sustained growth.
As for debt markets today, they are getting quite hot. The market has been littered with repricings and the US syndicated market has returned, influencing the European market in the same way. Leveraged credits across institutional loans were at more than $300 billion in the first quarter of 2024, compared to $72 billion in the first quarter of 2023.
"Return of the banks" has dominated conversations so much recently that institutions such as Citibank and LuminArx have partnered to raise direct lending alternatives, as have Wells Fargo and Centerbridge Partners through Overland Advantage. Has private credit reacted to the return of the bank or bank-combined offerings? Statistics suggest no, with private credit representing 24% of the $3.8 trillion in US assets under management over sub-investment grade credit, compared to 5% in 2005.
What is transpiring, however, is a tightening of terms, whether economically with private credit deals pricing spreads of 4.5% or on covenants with an increasing number of covenant-lite deals in the mid-market.
When discussing cross-border private markets, it's impossible to ignore global politics. Across the United States and the United Kingdom, we can expect significant political shifts in 2024. Against the backdrop of more stable environments and based on a variety of factors ranging from industry to geography, the private markets have been satisfactorily busy for many, extremely busy for others and patchier for some. Can politics impact that? Of course.
But recent years have shown that private markets are reacting less and less to general political shifts. Public markets are still far more reactive though, so in the second half of 2024 there is still much to play for.
What is clear is that the need for high-quality service on complex, cross-border work has not waned and is not expected to. We look forward to continuing to provide our clients with creative and dynamic solutions as we grow our relationships in the second half of 2024. It certainly promises to be a complex but productive market.
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