Our recent webinar, "Gearing Up for 2024: Private Equity Trends & Predictions", saw three industry experts – Ali Al Alaf (MD and Head of European Origination at the Riverside Company), Chris Blaine (MD and Partner at BCG) and Kristy Khoury (Director, Value Creation at Warburg Pincus) – briefly explore what’s happened this year before delving into their expectations for the upcoming 12 months in a lively, thought-provoking discussion.
Moderated by Sam Glasswell, our CEO and co-founder, the discussion covered a range of topics, including:
- The 2023 dealmaking lull and what the rebound could look like.
- How companies should prepare for becoming more operationally robust.
- Which type of deal-making remained relatively strong.
- How generative AI could shape the future of the industry.
Click here to listen to the full webinar.
Could you give us your insights as to how you've seen this year evolve?
In 2023 the private equity space has seen a “slight slump, putting it mildly”, said Chris Blaine. The bid-ask spread stayed wide as companies tried to conserve cash, with the hope that they could “grow into the valuation” that they had initially hoped to, he added.
Ali Al Alaf highlighted the fact that deal volumes in Europe were down by 25-40% and had declined for five consecutive quarters. However, there was “a very interesting evolution” in terms of how the deal size categories were impacted.
“If you look at the deal size categories, the large-cap, the small market, and then the mid-cap, the deal size categories have been impacted differently over the past 18 months. So the largest deal size categories have shrunk, and the same with small deal size categories, whereas the mid-market has grown in importance… It's been impacted, no doubt. Volumes have come down, but it's taken market share.” - Ali Al Alaf
Despite the difficulties, Blaine is still optimistic for the upcoming year, for two main reasons. First, the US Federal Reserve has issued guidance that they’re “hopefully” done with tightening the interest rate. And, second, there is still activity taking place in the private equity space in a few areas – “but as we get to a more stable interest rate environment again, we expect that those will start being able to trade again”.
What are your predictions for Private Equity in 2024?
When asked for their view of what will shape the upcoming year, our interviewees highlighted a number of expectations. Some of them are:
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Demand will pick up again
Given that 2023 saw a big slow-down in terms of dealmaking, next year should see pent-up demand start to unlock. But it will take time. The extent of this appetite should become apparent within the first quarter, however.
“I am cautiously optimistic that we're gonna start seeing a ramp in. I don't think it's going to be on January 1st - the floodgates open. But we are seeing more and more sell-side mandates that are moving forward. Either they're starting now, or they're starting in January, so I think it'll be that slower ramp-up. What I’m not sure of right now is, do the prices align with the buyers. How much willingness is there to do the deal versus just test the waters? So that could slow stuff down for another couple of months.” - Chris Blaine
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Caution will abound on transactions
Al Alaf thinks that investors will continue to be cautious until they see deals pick up. “The number of transactions probably needs to come up a little bit, so that sellers feel comfortable pushing the button and going into market because it's all about deal certainty.” And this will occur despite the financing environment not improving, simply because “we've adjusted to them, and we now know how to make deals in this new environment”.
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There will be a focus on efficient growth and cost structure
As Khristy Khoury, director of value creation at Warburg Pincus, forecasts, businesses will make use of the “easier” versions of generative AI to make their workforces more efficient, before realizing these can’t cover everything. This will lead to a resurgence of robotic process automation and, she hopes, investments in the “less sexy parts of data strategy”, which are essential for building strong foundations.
What are your perspectives on generative AI and how will it move from hype to deployment?
Khoury started the conversation by noting that, like most popular emerging trends, there are always many different opinions. “People either immediately say it's overrated, or it’s the silver bullet for everything”. However, the truth lies somewhere in the middle of those two approaches.
Whatever your opinion, it’s important to know the risks and implement the right foundations, “especially if you’re going to get a little more creative rather than using existing tools”, Khoury added.
She mentioned that she’d seen some good examples, especially supporting sales or CS teams, but generally, companies need to invest in proper data infrastructure so they’re “ready to pounce” when the time is right.
“There are so many low-hanging fruit data things, that you don’t even need generative AI to do really exciting stuff with data… Even if you're not in a place where you're ready to use it, there's so much you can do. And you should definitely be investing in that right now.” Kristy Khoury
Al Alaf added “I do think that AI will eventually transform deal origination and parts of the deal-making process. But we're not there just yet.” For now, companies should focus on recognizing the importance of proprietary data and building up a data strategy to be able to fully leverage AI in the future.
For Blaine, who says that BCG has deployed various internal AI projects, the success of it all comes down to having the right approach and tailoring it to the specifics of their organization.
Regarding what companies should be looking at before leveraging AI to ensure the best chances of success, he says: “What does your internal data look like? Do you have bunch of siloed data? Do you have data that needs to be locked down more than it is? A lot of times we're seeing a lot of success when we start small… Let's not try and recreate everything that OpenAI, Google and other companies are doing. Let's instead take the base models, and apply them to a particular use case and figure out how it fits in our workflow.”
Watch the recording here to hear the full discussion and Q&A segment.
