Private equity returns remain subdued in 2024 as transaction drought drags on

Private equity payouts will deliver just half the value of their usual annual cash returns to investors this year, marking the third consecutive year of underperformance, driven by a slowdown in dealmaking activity, the Financial Times reports, citing industry executives. Buyout firms typically sell approximately 20% of their holdings each year, but funds have collectively underdelivered on USD 400 bn in payments to investors over the past three years, according to Cambridge Associates.

Sales are closing at discounts: A recent Goldman Sachs report said that sales often close at discounts of 10-15% below internal valuations.

The slowdown comes on the back of a challenging environment for agreements: Higher interest rates have driven up financing costs and caused corporate valuations to slide, making it difficult for firms to secure attractive transaction terms, the salmon-colored paper notes. M&As are expected to end the year with a 15% y-o-y growth to USD 3.5 tn, marking a 7% y-o-y increase in volume — falling short of earlier hopes for a bigger recovery amid hopes for lower rates and more investments from private equity players.

Recovery in 2025? Industry executives and advisors expect M&A activity to pick up pace next year, potentially helping PE firms address what Bain & Company describe as a “towering backlog” of USD 3 tn in maturing agreements requiring exits. Popular public listings in 2024 — including Lineage Logistics, Standard Aero, and Galderma — have also buoyed confidence among PE players looking to exit their investments, along with the rally on Wall Street in the past couple of months since Donald Trump’s election in the US.

Continuation funds — where assets are sold between funds managed by the same firm to facilitate exits — will be a key strategy to return capital to investors. Jefferies forecasts that these funds will account for a record USD 58 bn in PE exits this year, representing 14% of total activity, up from just 5% during the 2021 peak.

Even so, it won’t happen overnight. “There is an expectation that the wheels of the exit market will start to turn. But it doesn’t end in one year; it will take a couple of years,” Cambridge Associates’ global head of private investments, Andrea Auerbach, said.

ALSO WORTH KNOWING ON PLANET FINANCE-

US banking giants take over US banking industry in 2024: US banks JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo generated a net income of USD 88 bn in 9M 2024, accounting for 44% of the sector’s income in the US, according to Financial Times calculations. Including US Bank, PNC, and Truist, the seven largest banks generated 56% of the sector’s income during this period, up from 48% in 2023. This marks the largest share of industry net income in the first nine months of the year in nearly a decade.

MARKETS THIS MORNING-

Asian markets are mostly up in trading, with Japan’s Nikkei and Topix gaining ahead of news of a bumper budget set to be announced for its fiscal year starting April. South Korea’s Kospi is also up, while China opened lower, and Hong Kong’s market remained closed for Boxing Day.

Wall Street futures are little changed as markets come back from the Christmas holiday, with investors holding their breath for a so-called “Santa Claus rally” to end the year on a strong note.

THE CLOSING BELL: TADAWUL-

The TASI rose 0.2% yesterday on turnover of SAR 2.8 bn. The index is down 0.6% YTD.

In the green: Al Baha (+8.3%), Red Sea (+6.3%) and SIDC (+5.1%).

In the red: MBC Group (-3.3%), Bawan (-3.05%) and Savola Group (-3%).

THE CLOSING BELL: NOMU-

The NomuC rose 0.3% yesterday on turnover of SAR 39.7 mn. The index is up 26.4% YTD.

In the green: Mayar (+14.2%), Sama Water (+13.4%) and Meyar (+9.9%).

In the red: Al Dawliah (-10.9%), WSM (-7.4%) and AlJouf Water (-6.1%)