PitchBook News - When will PE be PE again?

These high debt costs make it hard for the buyout math to pencil out. While investors have started to bring more equity to deals, interest rate coverage ratios have still dropped to just 2.4 times EBITDA on deals completed in the first three quarters of the year.

Momentum in private credit financings has slowed, which suggests demand may be running dry at current prices given how much capital has been allocated to the asset class in recent years.

While lower interest rates may be on the horizon, even the most optimistic expectations indicate this will not happen until at least the first quarter of 2024. If inflation remains above 2% and the economy stays resilient, the timing could easily be pushed to the second half of the year.

Meanwhile, the prospects of selling portfolio companies are downright grim. The slump in exit activity has been ongoing for a year and a half and is getting worse. Relative to its long-term trend, total exit value in the past six months is the lowest in at least 30 years, including the GFC and COVID-19 periods.

Investors have not yet capitulated by selling into a weak market, but holding periods are getting dangerously extended. Over 30% of buyout-backed companies have been held for more than five years.

The lack of exit activity is likely to contribute to an increasingly challenging fundraising environment. Based on the drop in fund distributions back to LPs over the last year, we expect buyout fundraising over the next year will be approximately 30% below its long-term trend.

Higher long-term interest rates pose an additional challenge to fundraising as asset allocators are faced with better risk/return tradeoffs across asset classes. Institutional investors with fixed return targets will likely be reassessing their allocations to riskier assets such as PE.

For more information and data on the topics discussed, please download the free report: The Waiting Game