The private equity market, which, despite showing broad resilience, encountered a slowdown in dealmaking and fundraising activities due to increasing geopolitical tensions and macroeconomic uncertainties, was one of the main revelations of the 2023 investor survey published by investment management firm Montana Capital Partners.
The first half of 2023 saw a significant 65% decline in exit volume compared to the previous year, leading to an accumulation of unrealised assets, Montana Capital Partners, in its eleventh annual investor survey. Additionally, the survey noted increased capital call activity, necessary to manage rising interest costs for credit lines, which has notably influenced cash flow planning and allocation targets for private equity fund investors. This complex scenario is creating more difficult fundraising conditions for general partners and a heightened need for liquidity solutions in the near term, revealed the results published in November 2023.
Distribution dynamics and liquidity needs
The survey’s key findings highlighted a considerable slowdown in distributions within private equity portfolios. With two-thirds of respondents receiving lower than expected distributions in 2023, and a third feeling a significant impact, the landscape has shifted markedly. While 26% of investors are adopting a cautious ‘wait and see’ approach for 2024, 44% are bracing for lower distributions than initially planned. This situation has propelled the need for liquidity to the forefront, particularly influencing decisions to consider secondary sales of private equity commitments.
Investors continue to prioritise investment strategies that have historically proven to be resilient in times of economic downturns and high interest rates. The importance of secondaries will only grow as investors seek stability, performance, and early liquidity.
Investor appetite and strategy
Despite these challenges, private equity continues to attract investors, noted the report. The survey recorded an increase in allocation to private equity, with 84% of family offices and 41% of institutional investors allocating more than 10% of their portfolio to this asset class, up from 81% and 39% last year respectively.
Investors are particularly favouring mid-market buyout and secondaries, chosen by 75% and 66% respectively, seeking stability, performance and early liquidity. These strategies, especially in the mid-market segment, are preferred for their higher potential for operational improvements and less dependence on financial engineering for generating returns, Montana Capital Partners has stated.
Secondaries allocations
The survey also revealed an expected rise in allocations to secondaries, with 85% of respondents planning to maintain or increase their investment in this area. The most favoured transaction types are limited partners-led transactions in the small and mid-market segment and multi-asset GP-led transactions, chosen by 37% and 24% of respondents, respectively.
These preferences stem from the less competitive nature of these transactions and the opportunity they offer for exposure to high-quality assets with some level of diversification.
Private equity experienced a slowdown in deal and fundraising activity in 2023 but has remained resilient in terms of performance. The slowdown of distributions presents a very attractive opportunity set for secondary buyers, and we are currently seeing a robust flow of both LP-led and GP-led transactions.
Fundraising outlook
Looking ahead to 2024, the private equity fundraising environment is anticipated to be challenging. While 78% of investors saw positive or flat performance in 2023, a greater number expect to decrease their overall private equity allocation in the next twelve months (9% of investors, up from 3% last year). The slowdown in distributions is prompting almost half of the respondents to reduce their deployment pace and 25% to decrease their commitment sizes, indicating a more competitive landscape for GPs in securing allocations from limited partners.
Established in 2011, Swiss-based Montana Capital Partners specialises as a global private equity secondaries investment manager, focusing on the mid-market. Montana Capital Partners advises five funds and manages total assets of €3.2bn for its investors, as of June 2023.