PE Banking on Secondary Exit

In 2023, the IPO markets displayed a lackluster performance, with only 72 IPOs from PE-backed companies, marking the lowest count since 2019. Concurrently, the global deal-making landscape experienced a slowdown, witnessing a 17% decline in M&A activity to reach a record low of USD2.9 trillion – a figure not seen in over a decade.

Despite improving conditions for sales to corporate strategic and IPOs, the global PE exit scenario remained subdued for the second consecutive year in 2023. The exit totals held steady on a y-o-y basis, as Preqin reported 1,962 PE exits, only marginally different from the 1,959 recorded in 2022. This trend persisted from the previous year when inflation and interest rate hikes closed the IPO window and an uncertain economic outlook dampened M&A enthusiasm.

Exit Building Up

A breakdown on the number of exits by quarter as illustrated above has shown a more detailed trend of the exit pattern. While exits declined in each quarter of 2022, the exits were building up quarter by quarter in 2023.

This momentum is expected to carry over to this year, 2024 as PE fund managers come to terms with portfolio company valuations dented by higher-for-longer interest rates and slower economic growth. According to Guerzoni, EY Global Vice Chair, a substantial short-term surge in IPOs seems improbable. However, the executive’s outlook for 2024 includes a potential rise in dual-track exit processes. In this approach, a PE firm concurrently explores both an IPO and a trade sale. This strategy enables a fund manager to maintain plans for an IPO while remaining open to the possibility of a motivated buyer presenting a more compelling offer.

The PE Exit Trend

As seen from the exit trends for the last 5 years, trade sales accounted for more than half of all PE exits. The muted IPO market has fueled a rise in the secondary deals that enable investors to cash out and exit without having to wait for IPOs or company sales, the conventional and preferred methods of exiting.

Secondary Deals in the Pipeline

The growing demand for liquidity is fueling an expansion in deal activity within the secondary market, and this trend is expected to persist in 2024. Following an active year in 2023, the narrowing bid-ask-spread on the secondary market coupled with sustained liquidity demand sets the stage for a robust period in secondary transactions. 

Aggressive fundraising for secondaries-dedicated funds will also contribute to the robust pipeline in 2024. GPs managing substantial funds dedicated to secondaries are poised to deploy their dry powder in the coming year. Hence, deal activity in this asset class will only continue to grow, providing investors an opportunity to participate early on in this asset class’s boom.