In 2024, European private equity exits are expected to be subdued, fundraising may see declines, megadeals are likely to be rare, and there will be no significant recovery in venture capital-backed IPOs: these are some of the main takeaways from Pitchbook’s 2024 European private capital outlook report, published on Thursday 21 December.
Analysts Nalin Patel, Navina Rajan and Nicolas Moura emphasised that 2023’s muted deal values were a correction following the unprecedented activity levels in 2021 and 2022, rather than a collapse in private capital activity. The trio noted the only noteworthy exit of 2023 was the initial public offering of UK-based Arm, representing a rare substantial exit in a year where VC-backed public listings struggled due to modest share prices of previously VC-backed public companies. The reluctance, according to the report, to risk public listings was accompanied by macroeconomic challenges such as inflation and weak economic growth. However, there are emerging signs of market sentiment improvement, with interest rate hikes paused and a flattening cost of debt.
Looking ahead to 2024, Pitchbook offered several key outlooks for the European PE and VC markets.
A muted exit market
As of November 2023, the PE investments/exits ratio reached its highest level since 2010, driven by general partners deploying significant amounts of capital amidst low interest rates and reduced exit opportunities, notably in public listings. Pitchbook expects this trend to continue into 2024 due to persistent macroeconomic challenges, including potential recessions and sustained high interest rates, which could further suppress exit activities relative to investments.
The main risk to this outlook is unexpected interest rate cuts, either due to a rapid decrease in inflation or a recession, which could either boost exits and change investment dynamics or increase investor risk premiums, maintaining the subdued state of public listings, says the report.
PE fundraising to face sustained resistance
In 2023, PE fundraising is set to reach a record high in capital raised, despite the lowest number of funds in over a decade, largely due to the significant contributions of the top three megafunds (44.4% of the total capital raised as of November 2023). This unexpected success occurs amidst challenging macroeconomic conditions and a general belief of reduced fundraising activities.
However, in 2024, fundraising is expected to decline, potentially leading to a record concentration in the top three funds, as less capital returns to limited partners and higher interest rates limit borrowing. The long-term growth of PE assets and potential interest rate cuts could influence future fundraising as well as exits dynamics.
Fewer megadeals to follow
From 2013 to 2022, megadeals, those with valuations of €1bn or more, made up an average of 24.2% of annual PE deal value, but in 2023 this dropped to 16.5%.
Pitchbook expects this trend to continue and the share of megadeals to stay below 20% in 2024, as high interest rates make large leveraged buyouts less attractive due to increased debt funding costs. This environment is likely to lead to a shift towards smaller, mid-size deals, and fewer deals exceeding the megadeal threshold. However, the potential for lower capital costs in 2024 and the availability of substantial PE funds could revive some larger deals that have been on hold, possibly increasing the proportion of megadeals if the interest rate environment becomes more favourable, said the Pitchbook analysts in the report.
VC-backed IPOs to remain anemic
In the second half of 2023, the prevailing financial sentiment in Europe had been ‘higher for longer,’ with central banks like the Bank of England and the European Central Bank maintaining high interest rates. This will likely remain the trend in 2024 as well, Pitchbook cautioned. This environment has negatively impacted long-duration growth stocks, particularly in the tech sector, as seen in the disappointing returns of recent IPOs such as Arm (-5.4%), Ionos (-20.9%) and Oddity Tech (-26.6%) as of November 2023. The IPO market remains sluggish, with VC-backed IPO exit values at only 9.9% of 2022 levels and counts lower than the previous year. Faced with these challenges, Pitchbook noted that the companies are exploring alternative financing methods like cost-cutting, mergers and venture debt.
According to the report, despite a healthy backlog of companies considering IPOs, the timing for a market recovery remains uncertain. If interest rate cuts occur, this could improve valuations and listing confidence, said the analysts, although it’s likely that these listings would still happen at lower valuations compared to previous years, given the ongoing correction in company valuations and a shift towards profitability in the startup ecosystem.
VC fundraising may find support
Despite experiencing weak returns and trough valuations in 2023, VC strategies are still considered a top-performing strategy over a 15-year horizon, per Pitchbook’s Europe benchmarks report. Consequently, Pitchbook anticipates limited partners to continue to invest in these strategies, aiming to optimise returns by investing at current lower valuations.
In 2023, the top 10 venture fund closes amounted to €6.6bn, representing 39.2% of the capital raised, while the top 10 funds open since 2020 have a potential to raise €9.1bn. Extending this to the top 20 funds, the total potential capital amounts to €12.8bn.
However, venture fundraising lags behind other asset classes, reaching only 59.3% of 2022 levels by November 2023. The challenging fundraising environment, characterised by lower overall capital raised and longer closing times, especially impacts emerging firms. With continued valuation declines and uncertainty in macro factors like interest rates, LPs might remain cautious in allocating new capital to venture funds. This cautious approach and the potential underperformance of larger funds might affect the impact of these funds on the 2024 totals. However, Pitchbook does not see VC fundraising levels in 2024 to drop below 2023 totals.