Arthur D. Little: Private Equity H1 2024 Fundraising, Investment and Exit Activity Remain Challenging, but Industry Sentiment Shows Green Shoots of Recovery

Funds raise €59bn in H1, up 15% year-on-year, but investments decline by 11% compared to H2 2023, falling to €40bnStrong sentiment for increased transaction activity, more than 2/3rd of GPs and LPs expect a growing number of transactions in the coming 12 months while dry powder is at record levels of €410bnInvestment segments of high expected activity indicate a growing attractiveness for investing in Deeptech & AI, Defense and Business Services

Invest Europe, the association representing Europe’s private equity (PE), venture capital and infrastructure sectors, as well as their investors, and global management consultancy firm, Arthur D. Little (ADL) today published their 2024 pan-European Private Equity market sentiment report, alongside market activity data for the first half of 2024 published by Invest Europe.

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While activities remain challenging, sentiment and activity amongst both GPs (General Partners/fund managers of PE firms) and LPs (Limited Partners of PE firms/fund investors) are increasingly positive. 83% of GPs expect fundraising to stay the same or increase over the next 12 months – compared to 50% a year ago. This optimism matches investor views - over 90% of LPs expect higher capital commitments to private equity over the next three years.

The fifth annual edition of Invest Europe and ADL’s survey gives a forward-looking view of expectations and priorities for the Private Equity industry and is based on interactions with more than 250 managers and investors. Its positive short- and medium-term outlook is reinforced by Invest Europe’s H1 data.

• Private equity and venture capital funds raised €59 billion in the first half of 2024, a 15% year-on-year increase, but down by 28% compared to the amount raised in the second half of 2023. Over the same period, private equity funds invested €40 billion in European companies, down €5 billion or 11% compared with H2 2023.

Advances in technology and the uncertain geopolitical landscape are directing where investments are being made. Deeptech & AI now heads the list of most attractive target sectors, favored by 68% of GPs, closely followed by defense a new entry in the list of sectors. Dual-use technologies that can serve both civilian and military applications are a particular focus. 24% and 26% of GPs and LPs respectively say they are more willing to consider investments in this area. Renewables have dropped from the top five choices for investment, while sectors linked to squeezed consumer spending and legacy industries (consumer goods & retail, automotive, industrial equipment, chemical and transport) make up the bottom five investment destinations.

Showing increasingly positive sentiment, GPs intend to intensify their focus on exits with 66% stating they expect to concentrate on it more in the next year than in the previous twelve months. As a result, 71% of managers see more exit transactions in the next year compared to the last 12 months, a sentiment echoed by 68% of LPs. Both groups also expect increased valuation levels for assets. A rising tide of exits is expected to lead directly to an improved investment environment.

In terms of strategy, operations and investments, GPs were previously focused on the risks and opportunities presented by ESG. This has been supplanted by AI, as an investment opportunity, a technology to deploy at portfolio companies, and as a way of differentiating their own operations and performance. A third of GPs see the use of AI as a differentiator and over 80% of all respondents expect it to impact their operations in the near future. The potential risks to businesses posed by AI are also high on the agenda with 69% of GPs expecting an increased focus on the technology in their due diligence assessments, behind cybersecurity, which around-three-quarters of GPs expect to influence future due diligence processes.

At the same time complying with sustainability-related regulations remains a key priority for the industry. For GPs, ESG has become a normal part of operations, although for LPs it is still seen as the most important factor for private equity in the near future, ranked top by 68% of respondents, in line with last year. 53% of LPs increasingly expect managers to register their funds as Article 8 or Article 9 under SFDR regulation, effectively meaning vehicles that have a strong focus on ESG objectives or position themselves as “impact” funds.

Jonas Fagerlund, Partner and responsible for Private Equity segment at Arthur D. Little says:

• “Our report shows that an improving macro economic backdrop is beginning to have a positive impact on sentiment within the European private equity and venture capital industry. Stabilization in inflation and falling interest rates are feeding green shoots, as seen by modest increases in exits in the first half of 2024, backed up by the data from Invest Europe’s activity report. This positive trend is expected to accelerate along with fundraising and investment activity. However, volatility and uncertainty are never far away. Escalating conflict in the Middle East and the actions of the new US administration could have global implications - these risks are unpredictable but cannot be underestimated.”

Eric de Montgolfier, CEO of Invest Europe, commented:

• “Private equity activity remained challenged in the first half, yet there are signs of green shoots. It is also clear that investors overwhelmingly support the asset class, and that both they and managers are more optimistic about the future. With record levels of dry powder, and a focus on AI, deeptech and other opportunities, private equity is well placed to help drive innovation, competitiveness and sovereignty in industries that make a real difference to European citizens.”

To access the report, click here: https://tinyurl.com/bdfrympk

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