Investor sentiment around private equity deal activity continues to paint a mixed picture. Economic uncertainty, higher-for-longer interest rates, and geopolitical tensions have created an environment of heightened caution. While the two-year decline in deal activity appears to be leveling off, the rebound remains sluggish.
The tenth edition of The Science of Deal Sourcing 101 from SPS by Bain & Co. delves into the data behind this slowdown, providing a unique perspective on deal pipeline health and future deal activity. This annual analysis evaluates the volume of deals logged in private equity firms’ pipelines compared to the percentage of those deals that eventually close, offering insights into the current efficacy of the PE deal-making market.
This year’s analysis highlights a striking trend: a record low conversion rate for deals in PE pipelines. Historically, PE firms closed about 30-40% of deals initiated. Most recently, that number has dropped to a median of just 24%.
While recent quarters have seen a decline from the peaks of 2021 and 2022, Q1 2024 deal flow remains comparable to pre-pandemic levels, up 25.9% from Q4 2019. However, the percentage of deals that close is lagging, suggesting that while firms are seeing deals, they may not meet the stricter criteria demanded by today’s uncertain market.
Though the drop-in deal activity that began in 2022 is nothing new, the current slowdown is compounded by increased selectivity, as evidenced by the low conversion rate. PE firms are scrutinizing deals more rigorously, leading to fewer closures despite a relatively steady flow of potential opportunities entering pipelines.
Key Dynamics Impacting PE Deal Sourcing
Several broader market dynamics are influencing this PE deal sourcing landscape. Heightened competition, extended investment timelines, and a rigorous deal selection process contribute to a more strategic – and potentially slower – pace of dealmaking.
Although the global deal count is down 4% year-to-date according to Bain & Co.’s recent 2024 Mid-Year Private Equity Report, overall deal value is on track to match 2018’s total due to larger average deal sizes. This shift towards bigger deals likely reflects a focus on established companies with proven track records.
At the same time, an abundance of dry powder contrasts with a lagging exit environment. As evidenced by new findings in SPS’ 2024 Deal Sourcing Databook, holding periods for PE investments have reached an all-time high of five years, indicating longer investment horizons and a cautious approach to selling in today’s market conditions.
Coupled with a difficult fundraising environment, the lag in exits is creating a bottleneck, limiting the ability to free up capital for new deals and causing friction between GPs and LPs. GPs are under pressure to deploy capital, but disagreements on valuations are complicating dealmaking.
Strategies for Success in a Selective Market
Success in this selective market hinges on an adapted, data-driven approach that prioritizes sourcing deals aligned with your strategy and strengths. By leveraging the insights and tools offered by SPS, PE firms can:
- Identify your Deal Sourcing Strengths: Partner with our dedicated relationship managers and measure success with our annual Deal Origination Benchmark Report to determine the segments where your Market Coverage is a competitive edge.
- Seamlessly Manage High-Value Relationships: Streamline outreach by segmenting and flagging the contacts who are most active in your target market.
- Optimize Deal Sourcing: Maintain a robust deal pipeline and automatically track relevant deals with our CRM Integration, Pipeline Analysis, and Broken Deal Alerts features.
An eventual return to robust deal activity is inevitable, but the presence of high-quality deals represents a chance for adaptable firms to capture value in the meantime. By leveraging data-driven strategies and the right automation tools, PE firms can position themselves to capitalize on opportunities as they arise.
