Private Equity Highlights and 2024 Outlook

A year of rising interest rates and slower growth has proved challenging for the private equity industry. Yet, despite a decline in fundraising and dealmaking coupled with debt becoming costlier and scarcer, successful PE firms are finding a way. Learn what dealmakers need to know as they harvest their holdings and kickstart capital raising to sustain their investment cycles into 2024.

Market Trends

In a major reversal from 2022, take-privates have become more attractive, with many general partners (GPs) purposefully scouring the public markets for deals, particularly in the undervalued European and Asian markets. Private equity firms continue to find a way to seek returns despite geopolitical tension, high interest rates and inflation leading to a decline in fundraising and dealmaking.

M&A in the technology, media and telecommunications industry has shown resilience, with digitalization being key to the positioning of businesses in the healthcare, finance, industrials and energy sectors. ESG has proved an opportunity and a challenge, with private equity firms seeking opportunities through impact investing, while being prepared to walk away from deals that pose ESG concerns.

With averse economic pressure worldwide, the number of GP-led secondaries and single or multi-asset continuation funds increased, providing the opportunity to consolidate funds, rebalance asset allocations and free up capital in the current low-liquidity environment. This has provided fewer traditional exit opportunities.

A major challenge to replacing cash reserve for smaller GPs in 2023, as fundraising contracted, was competing against the larger and more diversified private equity firms. In turn, this led to a bifurcation of the market. Firms are turning their attention to the retailization of alternative investments as a source of untapped liquidity as they look for new opportunities and better returns in a challenging market.

Legislative and Regulatory Developments

The Securities and Exchange Commission’s (SEC) private fund adviser rule increased compliance obligations by requiring private funds to issue quarterly fees, issue performance reports and perform annual audits, as well as to disclose certain fee structures. It also bars private funds from offering investors preferential treatment when it comes to portfolio exposures and ability to cash out.

The SEC’s sustained focus on regulating the operations of private funds in its rulemaking is not the only hurdle, however. Antitrust authorities worldwide continue to monitor private equity-led acquisitions. The effect of foreign investments – inbound and outbound – remains a focus in jurisdictions across the globe, with scrutiny applied to deals perceived to have an effect on national security.

In the EU, the Foreign Subsidies Regulation (FSR) became applicable in July 2023. This novel regulatory regime is designed to address perceived market distortions caused by non-EU subsidiaries. For private equity firms, the FSR imposes an additional compliance burden, requiring investors to undertake extensive information-gathering and monitoring exercises to determine the applicability of the FSR, and to fulfil potential notification obligations.

Outlook

In 2024, the private equity industry will have to adjust to more complex compliance requirements and increased public scrutiny of deals. The U.S.’s Federal Trade Commission proposed a change to the Hart-Scott-Rodino Antitrust Improvements Act, which would trigger a significant anti-trust investigation for every transaction valued over the reporting threshold, currently at US$111.4 million. This change potentially captures a swathe of private equity deals. In Asia, Singapore proposed a new law regulating significant investments into entities designated as critical to the country’s national security interests. The Significant Investments Review Bill was introduced in November 2023 and is intended to safeguard strategic sectors. 

In other predictions for the year ahead, the engagement of professional advisers at the early stage of deals that pose regulatory complexity, such as take-privates, could raise challenges. This is particularly important in the U.S., with the SEC making private funds a priority for rulemaking. Meanwhile, the rise in take-privates has led to litigation. Stockholder-plaintiffs have recently secured significant damages awards in the Delaware courts against acquirers citing breach of fiduciary duties, a trend that is likely to continue.

GPs will continue to review alternative options to traditional exit routes to drive the fundraising cycle and address the liquidity gap, such as secondaries and continuation funds. Exploring this option can raise capital and tap potential expertise, strategic guidance and access to invaluable networks.

The pursuit of retail investors is predicted to intensify in the U.S. and develop further in the European and Asian markets. This development requires a re-examination of fee structures and administrative capabilities, and is likely to attract regulatory scrutiny. Private equity firms are expected to diversify, and consolidation in the market is likely, given the large-cap multi-strategy asset management firms the winners in the battle for capital. With an estimated US$1.2 trillion of dry powder yet to be deployed, private equity is well placed to sustain investment cycles in 2024 and provide liquidity to investors.

Sector Matter Highlights

• Dechert represented funds affiliated with Cerberus Capital Management, the largest shareholder in retail grocer Albertsons, in relation to Albertsons' definitive agreement to merge with Kroger, another retail grocer. Dechert's private equity/M&A lawyers collaborated closely with antitrust colleagues to devise novel solutions designed to enable Albertsons and Kroger to enter their definitive purchase agreement and respond structurally to regulatory challenges. The transaction is pending regulatory clearance.
• Dechert advised KKR in connection with more than 22 individual financing transactions totaling over US$11 billion, including asset-based facilities, rated notes issuances, repurchase transactions and other innovative structures.
• Continuing in its role as a trusted adviser to the Singaporean sovereign wealth fund, Dechert advised GIC on its investment in Quantexa, a global leader in decision intelligence solutions that serves the public and private sectors. The investment values the British tech company at approximately US$1.8 billion.