Private equity firms under pressure to kickstart UK dealmaking
Private equity fund managers are coming under mounting pressure from their investors to begin striking deals after a sluggish two years hampered by political turmoil and lofty interest rates, advisers have said.
While deal value ticked up through 2024, backers of top private equity funds are taking a “sterner” tone with fund managers after a slow period in which firms have largely held off both selling assets and putting dry powder to use, lawyers told City PM.
Dealmaking increased 36 per cent by value in the first nine months of 2024 after a slow 2023, driven by a narrowing of valuation expectation between buyers and sellers and bullish sentiment translating “more directly into deal activity”, according to EY.
However, after two years of quiet deal flow, patience from private equity funds’ investors, known as limited partners (LPs), is wearing thin and firms are agitating for PE houses to begin striking deals, lawyers and bankers say.
“As the market shows signs of improvement, so too will market confidence and PE will have a higher risk tolerance,” Adam Wedgwood, head of financial sponsor coverage at investment bank, Cavendish, told City PM.
The pressure from LP’s to deploy capital remains and those who are behind on deployment will certainly be looking to play catch up in 2025.
Private equity firms have been willing to hold on to assets for longer to avoid selling up at cheap prices amid lowly valuations. Public markets have also been largely shuttered and investment firms have been unable to exit via IPOs.
However, assets hoovered up by private equity houses in a post-pandemic deals boom in 2021 are now reaching maturity and LPs are keen to see a return, deals lawyers at Herbert Smith Freehills said.
“We’re certainly aware of more situations where LPs are putting pressure on GPs to do something,” said John Taylor, a private equity partner.
“It’s always very hard to be sure about how real that is, because these are necessarily behind closed doors discussions, but we’re seeing more chatter about LPs getting a bit sterner with their GPs than we had before.”
Michael Jacobs, an M&A and equity capital markets partner at the firm, said there is “not an infinite supply of patience to crystallise returns” from LPs, though they are “economically rational at the end of the day as well”.
While analysts in both the UK and US have pared their bets on interest rate cuts on the expectations that prices will rise more sharply, fuelled by potential tariffs from Donald Trump, dealmakers say pressure from LPs will likely help fuel a rise in activity this year.
“Despite an uncertain macroeconomic and geopolitical outlook, we anticipate the uptick in deal activity to continue – and perhaps improve – in 2025,” wrote Albrecht von Alvensleben, managing director of European private Equity at CDPQ, in a recent report.
“The combination of significant accumulated dry powder, constructive debt markets, and optimism around the IPO market is pointing to next year ‘unlocking’ a backlog of asset sales and deployment.”
The “increasing pressure on GPs” to deliver returns was likely to fuel activity further, he added.