2024 Private Markets Outlook

As noted in our 2023 outlook, private equity exits slowed dramatically in 2022, and this trend has since continued. Exit activity is arguably the most important link in the PE chain of capital formation and an indicator of the health of the overall PE market. Exits fuel fundraising and the investment of capital. They also impact the allocation or reallocation of capital across institutions.

We believe that many asset allocators have built private equity portfolios that essentially deliver private market beta because they are allocated to hundreds of companies across industries—with the hopes that a few will realize value through an exit event. This can be an effective strategy in a climate where M&A activity and the IPO market are firing on all cylinders, but that is certainly not the case today.

As in previous environments, and especially in this one, we have maintained that it is critical to gain access to, and build portfolios of, “tier zero” companies. We view tier zero companies as those that are clear leaders in their respective verticals and have a legitimate line of sight to an exit plan.

Source: PitchBook, as of 12/31/23. This ratio tracks the number of PE exits in any given period against PE investments, excluding addons.

While PE deals and exits have slowed, secondaries activity has remained robust. 2023 was the third consecutive year in which secondary volume surpassed US$100 billion. We expect that the global secondary market will continue to experience significant growth in the years ahead due to the substantial amount of capital committed to private market funds and LPs increasingly embracing the secondary market as an effective portfolio management tool. In addition, the trend of fund sponsors seeking liquidity solutions for their LPs through organized transactions is expected to continue to contribute to significant secondary deal flow.

During times of economic uncertainty and slowing portfolio company exits, the secondary market can be an important release valve to provide liquidity to investors. We believe we’re in the early stages of a generational secondary buying opportunity in private markets that will take multiple years to play out.

Source: Jefferies Global Secondary Market Review. Transaction pricing data is sourced from Preqin database and is self-reported and/or gathered from industry professionals including fund managers, investors, and service providers. As of January 2024.

After a prolonged regime of cheap debt and loose lending standards, 2023 saw a shift in negotiating power from borrowers back in favor of private lenders. Adding to lender power was the dramatic pullback in traditional banks’ liquidity in the middle market, as the collapse of Silicon Valley Bank and other regional banks reduced their appetite for risk taking. At the same time, higher base rates, even those that settle back down to the 2-4% range, may have a profound impact on middle market corporate borrowers. Over the past decade, many were playing the “amend and extend” game, where refinancing with cheap debt kept their businesses operating without the need to address long-term debt issues. But that may no longer be the case, as debt loads can no longer be rolled over so cheaply.

While current market dynamics should benefit the entire asset class, we also think there will be a resurgence in more niche private credit sectors outside of the dominant direct lending space. Smaller, more opportunistic strategies that thrive in distressed lending environments like special situations and commercial real estate lending may see fertile opportunity sets as many debt-saddled companies and properties need solutions.

A pullback of traditional lenders comes at a time when a US$1.3 trillion wall of debt is scheduled to mature in the next four years. Furthermore, higher base rates will make the typical “amend and extend” process that was common in the ultra-low rate environment no longer an option for some companies coming under stress. Many challenged middle market companies must go down a different path to extend their runway and avoid the value-destroying process of bankruptcy in this environment. This opens a new avenue for private lenders to provide creative capital solutions to “good companies” with “bad balance sheets” in a market where these types of opportunities were previously scarce. 

Source: JP Morgan U.S. High Yield and Leveraged Loan Strategy, S&P HIS Markit. As of October 10, 2023

Commercial real estate (CRE) was in the headlines for much of 2023, with the office sector garnering most of the press. We believe the office sector's challenges will continue throughout 2024, but CRE is more than just office. 

In fact, CRE portfolio allocations have shifted significantly over the years. Office, once the largest sector, has fallen sharply to 19% of the benchmark (down from nearly 40%); while industrial, a top performing sector is now up to 33%. Other property types like multifamily, self-storage, data centers, and student housing, for example, have become a much larger part of the real estate investable universe.

Looking ahead, we believe there are five broad macro themes that will impact demand for CRE in the years to come: demographics, technology, shifting patterns of globalization, housing affordability/shortage, and resiliency. These will provide meaningful structural tailwinds for decades.

Source: Clarion Partners Investment Research, NCREIF, Q4 2023

Note: all figures are in US dollars.