New York, October 1, 2024 – Despite a slight increase in deal flow, PE firms are experiencing deal fatigue, seeing only 16.5% of target market deals amid declining closing rates according to the analytics from the recently published 2024 Deal Origination Benchmark Report from Sutton Place Strategies by Bain & Co. (SPS).
The report, released annually each fall, provides private equity (PE) sponsors with an in-depth comparative analysis of their deal sourcing effectiveness relative to peers. Each SPS client receives a custom DOBR comparing its market coverage to the overall industry and a peer group of similar private equity firms, defined by target investment criteria. The 2024 edition includes 176 qualified PE firms, segmented into 8 different peer groups.
Below is a high-level overview of the key insights:
At 16.5%, average Market Coverage (MC) has remained relatively flat year-over-year, despite a slight 1.5% increase in median annual deal flow. Notably, the following peer groups experienced a slight uptick in MC, bucking the broader trend across most others:
- Generalist, Lower Middle Market: +0.8%
- Sector-Focused, Middle Market: +0.8%
- Lower Market: +0.8%
The industry is grappling with growing “deal fatigue,” as the Percent Transacted (the portion of sourced deals that ultimately close) has decreased by 2% compared to 2023 and 7% compared to 2022. Compounding the issue, the average Time to Close has lengthened. Specific peer group data highlights the divergence in deal flow:
- Sector-focused, Lower Middle Market: +36.2% YoY increase in deal flow
- Generalist, Middle Market: +32.3% YoY increase in deal flow
- Quasi-generalist, Middle Market: -30.7% YoY decrease in deal flow
Despite expectations, a surge in deal flow has not materialized. However, signs of improvement are emerging as central bank rate decreases point to a potential recovery in 2025.
While platform acquisition activity has remained steady, add-on acquisitions have surged, with the median number rising from 3 deals in 2023 to 5 deals in 2024 (+150%). This increase is driven by the ongoing trend of buy-and-build strategies:
- Sector-focused, Lower Middle Market: Median add-ons tripled from 1 to 3 deals
- Upper Market: Median add-ons increased from 8 to 10 deals
PE firms are becoming more selective, with Target Market Relevancy (the percentage of deals that align with a firm’s strategy) declining by 5% YoY. This indicates a shift toward greater sector focus or selectivity in sourcing deals.
“As we mark the twelfth year of publishing the DOBR, the report continues to evolve, driven by valuable feedback from our clients. Each edition reveals unique trends in PE firms’ sourcing strategies, and this year is no different,” said Founder & CEO of SPS, Nadim Malik.
“The insights in this report highlight the strategic shifts shaping deal origination today, offering actionable intelligence to help our clients stay ahead in a dynamic market.”
In summary, this year’s edition highlights a modest increase in closed deal activity, though overall deal flow remains constrained. Sponsors continue to face challenges such as lower closure rates, growing deal fatigue, and fewer quality opportunities, but can still capitalize on add-on acquisitions by staying strategic in their sourcing efforts.
