By 2024, private equity fees are down by 50%

Get free updates

Register easily Private equity myFT Digest — delivered straight to your inbox.

Private equity funds will withdraw only half of what they typically sell in 2024, marking the third consecutive year that payouts to investors have fallen short due to a drought.

Buy-out houses typically sell about 20 percent of their investments each year, but industry executives predict the payout for the year will be about half that number.

Cambridge Associates, a leading adviser on private equity investments for large institutions, said its funds have dropped about $400 billion in payouts to investors over the past three years compared with historical averages.

The data shows increasing pressure on companies to find ways to return money to investors, including exiting more investments in the coming year.

Since early 2022, companies have struggled to strike deals at attractive prices as rising interest rates push finance costs higher and corporate valuations fall.

Distributors and their advisers expect merger and acquisition activity to accelerate in 2025, which could help the industry make up for what consultant Bain & Co. calls $3tn of aging deals to be sold in the coming years.

This year, several large public offerings have given private equity executives the confidence to take companies public, including food transport giant Line Logistics, aviation equipment specialist Standard Aero and dermatology group Galderma.

But Andrea Auerbach, head of global private investments at Cambridge Associates, cautioned that it could take years for the industry to catch up.

“There is an assumption that the wheels of the exit market will start turning. But it won’t end in a year, it will take two years,” Auerbach said.

Private equity firms have used new methods to return cash to investors but found holdings difficult to sell.

Increasingly, so-called follow-on funds — when a fund sells shares of one or more portfolio companies to another fund managed by the firm — are used to engineer exits.

Jefferies predicts there will be $58 billion in follow-on fund deals by 2024, accounting for 14 percent of all private equity exits. These funds account for just 5 percent of exits in the boom year of 2021, Jefferies found.

But some private equity investors are skeptical that the industry can sell its assets at prices close to current cash valuations.

“You have a huge amount of capital invested in speculation that is no longer worth it,” one major industry investor told the Financial Times.

Ahead of interest rate hikes in 2021, and many deals have warned of record purchases in 2021 with excellent valuations on corporate books.

According to a recent report by Goldman Sachs, private equity sales, which historically accounted for at least 10 percent of funds’ internal valuations, have been reduced by 10-15 percent in recent years.

“(Private) equity is generally still over-marked, leading to the fact that the assets are still sticky,” Goldman Sachs asset management Michael Brandmeier said in the report.