It’s All About DPI — Evening Brief – 06.24.24
An overhaul is underway in North American buyouts as firms adapt to a market that has lost one of its most major return drivers over the last 15 years, according to a report from Preqin.
The absence of multiple expansion caused by ultra-low borrowing rates has slowed buyout dealmaking compared to the post-pandemic boom year of 2021, but 2024 is shaping up for a steady comeback of activity, according to the firm’s Buyouts in North America Primer.
“The sense remains that 2024 will be a good (if not great) year for buyouts in the US. The return of robust deal-making would draw a line under a short period of rising inflation, high interest rates, and ponderous economic recovery for major economies that created such a watchful culture among buyers and sellers across the previous 12 months,” the report noted.
The $95.3 billion in North American buyout capital raised in 2023, more than the $82.2 billion outlier year of 2021, “should help with liquidity issues,” however it came amid more consolidation as the number of firms decreased. The top 10 funds received approximately 25% of all assets raised in 2023, up from 15% in 2021.
As a result, U.S. buyout managers now have $766 billion in dry powder as of April 2024, up from $509 billion at the end of December 2021.
Preqin stated that fundraising success has been a big plus for buyout managers this year, since it raised cash at a time when “liquidity was hard to find and conversations with LPs were tough.”
The analysis also highlighted declining enthusiasm for growth strategies and a rise in buyout funds targeting rapid growth possibilities, which Preqin attributed to LPs’ current desire for a clear view of future liquidity.
“Conversations between GPs and LPs have adapted to this slowdown in realizations, turbulence in the financing markets, and a desire to reduce overall costs,” Anjan Mukherjee, managing partner at BayPine, told Preqin. He added that the focus has shifted this year to topics such as distributed to paid-in capital (DPI), portfolio company capital structures and co-investing.
The slow rate of capital return has conflicted with the urge to raise new capital more quickly than in prior cycles, Mukherjee added, exacerbating the issue of LPs being overallocated to private equity, causing many to cut back or eliminate current general partners.
“DPI has become an important metric for GPs attempting to raise new funds. In addition, as regulation has shifted the balance of the lending landscape from banks to private lenders, LPs have become more focused on understanding credit counterparties and terms of the debt at portfolio companies.”