ECI’s 2024 private equity mid-market predictions
ECI, the leading mid-market private equity firm which recently reached the hard cap of £1 billion for ECI 12, gives its 2024 predictions for mid market private equity:
Private Equity needs to adjust to the new normal
Tom Wrenn, managing partner at ECI, comments: “The UK had interest rate normalisation back to pre-financial crisis levels earlier than the U.S. and Europe, and the PE market needs to fully adapt to the new world of higher interest rates. GPs will have a higher threshold for quality and will need to work harder to generate their returns. But that is our job – to genuinely create value – and investors that can do that consistently will have a better opportunity to differentiate themselves.”
Dry powder and pressure to deploy
Wrenn adds: “There remains a large amount of dry powder in the market. We’ve just raised ECI 12, achieving its £1bn hard cap, off the back of a great run of exits so we are in a good place with lots of available capital to deploy over the next three years and a small portfolio. Across the market though, deal-making has undoubtedly slowed due to economic uncertainty and many funds pushing out their fundraising in the hope of better times and delivering some exits before then. As a result, I expect activity to pick up pace next year as investors will need to get back to investing and funds will need to show exit activity, which is ultimately good for business growth and good for the economy.”
Pockets of growth amidst toughest fund-raising market since 2009
Jeremy Lytle, Investor Relations Partner, ECI, observes: “The global fundraising market has had a challenging 12 months. Investors continue to put a premium on managers who have stronger DPIs than their peers, and that won’t change in 2024. Increasingly LP investors are wary about NAV facilities or other ‘synthetic’ forms of DPI as General Partners look to return capital to investors. The slower pace of deployment combined with continued scarcity of LP capital will deter some managers from returning to the fundraising market in H1 2024 and it might also lead to LPs becoming more wary of committing to first closings if GPs will be in the market for 18+ months, so it will continue to be challenging raising funds in the new year.
However, the long-term, structural tailwinds benefiting private equity as an asset class remain strong, and although LPs are not currently seeing an increase in distributions from their General Partners, the worst of the well-documented denominator effect now seems to have passed so we are hopefully emerging from the nadir of the current fundraising cycle.”
The general election and a corridor for deals
Wrenn comments, “Historically, general elections have led to indecision and people holding off decision-making and investment, whether that’s foreign investment into the UK, significant M&A moves, or business owners wanting to sell. A pre-summer general election would be a positive as it might lead to a bigger September to December corridor for deals, while a late-election could dampen a bit more of the year. Having said that, the extent of the ‘unknowns’ around this election feels lower than normal and most people are already considering the impact of potential policy changes, so compared to other election years the slowdown in activity will probably be less.”
Finding top-quartile private companies to invest in will be more important than ever
Wrenn comments, “Investors that have proven track records on resilience are the ones that are able to thrive during challenging economic times.” The threshold of what they’re looking for will become higher in terms of predictable revenues, diversification, impact of inflation and FX rates, etc, but there are still plenty of opportunities to invest in exceptional businesses.
Wrenn adds, “From a top down perspective, the sectors you invest in will impact a private equity firm’s ability to deliver consistent results. At ECI we focus on niche subsectors with long term growth drivers such as IoT, Edtech or SME services, which are growing despite wider lower macro growth rates, so we are less impacted by the overall market trends. We are at a catalyst point in new evolving technology that can transform the value of businesses, so there are plenty of opportunities to deliver fantastic returns, with the right support and investment. Our jobs may be slightly harder, but they’re also more exciting than ever.”
