PitchBook News - PE chases the 'everything rally'

In Q1 2024, US PE middle market dealmaking eased from a burst of activity in Q4 2023 but still tracked flat to slightly ahead of the prior year.

A release of backlogged deals with less-than-stellar fundamentals likely accounted for the Q4 bump, as it coincided with a temporary collapse in deal multiples.

That all reversed in Q1 with trailing 12-month multiples on middle market buyouts pushing sharply higher, albeit on lower deal volume.

The snapback in multiples likely reflects more breathing room gained from lower borrowing costs, where spreads have compressed significantly. It also reflects an M&A recovery that has yet to broaden out.

PE firms are bringing their most attractive assets to the market for an M&A process and waiting on the rest.

A broadening out is what's needed to catalyze a strong uplift in deal and exit activity. In the "everything rally" of the last year, not everything has rallied equally as strong.

Private equity returned an estimated 8.4% in 2023, well below its historical average and also below the 26.3% posted by the S&P 500, although, as widely reported, that return has been highly concentrated in a small handful of heavy constituents. A better barometer is needed to appreciate just how concentrated returns have been and how narrowly valuations have risen.

 

A small-cap rally would do wonders for private markets.