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Private equity firms are champing at the bit for 2024

Jan 02, 2024

While some observers may be worried about jinxing a recovery, private equity (PE) firms are optimistic that the convergence of economic, political and demographic shifts signal a potential 2024 rebound in activity.

Cooling inflation bodes well for interest rate cuts to inject greater confidence in the marketplace in 2024.

PE deals fell 40% in value for the first nine months of 2023, compared to the same period in 2022, hitting a three-year low at $404.1 billion.

As the federal government in 2023 became more aggressive in regulating large PE deals, middle- and smaller-market transactions should gain a boost as they face fewer rules that serve as impediments. PE funds should be prepared to seize new acquisition opportunities. And middle market firms are especially primed to benefit.

Even amid political uncertainties in an election year, PE firms can position themselves to take advantage of opportunities and build resilience to thrive. Here are four key factors affecting the PE deal landscape in 2024:

1. Falling interest rates

The pent-up demand for investment opportunities should find a release valve as interest rates come down. As borrowing becomes less expensive, fund performance and company valuations will benefit. PE firms should be staffing up to deal with a big uptick in deal flow in 2024 as borrowing becomes more feasible and more attractive again.

2. Baby boomer estate planning

The sunsetting of the generous gift and estate tax exemptions at the end of 2025 is creating new urgency for retiring business owners and other high-net-worth individuals to take advantage of the tax cuts that were part of the Tax Cuts and Jobs Act of 2017. The law greatly expanded the lifetime exclusion amount that can be transferred to heirs or to a trust free of tax, freeing up capital for investment.

In 2023, $12.92 million per individual and $25.84 million for couples could be transferred free of tax. Without action from Congress to renew it, those amounts will revert back to 2017 levels, indexed for inflation.

Business owners are likely to act decisively in the year ahead to gift their companies to their children or to a trust. But with many children uninterested or ill-suited to take over a family business, opportunities are expanding for PE firms to come in as buyers as business owners review their options and look elsewhere.

3. Digital transformation

With the volume of data being created, copied and consumed tripling between 2020 and 2025, firms must be sure they can effectively access it and have tools to support data governance and due diligence. Leveraging AI productively is becoming a vital part of the process.

Being able to use customer, supply chain and lending data to support business goals will be differentiators in the competitive PE sector. Model scenarios are necessary for responding correctly to changing conditions.

Economic uncertainties throughout 2023, though they never materialized into a predicted recession, put a damper on technology investments, many of which can no longer be put off. Diligent, smart assessment of technology needs will be vital in positioning PE firms for success.

4. Labor force retention challenges

PE firms face a double whammy of labor retention issues. Not only do they need to find creative and innovative ways to attract and retain skilled staff for their firms, but they also need to keep retention challenges front and center within their portfolio companies. They have a responsibility to operate and manage those investments effectively, to grow the business and keep it successful for their investors to generate a positive ROI.

Technology and AI can only replace human contributions to an extent. Investments in training and professional development are key to developing and maintaining the workforce they need in both scenarios.

With challenging labor markets across most sectors, it is becoming increasingly vital for PE firms to focus on value creation within employee benefits and compensation to retain and attract talent within their portfolio companies. Similarly, they should be prepared to spend the needed resources to engage the workers and optimize their contributions.

How Wipfli can help

Is your firm restless and ready to take advantage of the lower and middle market deals in 2024? Wipfli’s team of specialists can help. From due diligence and data analytics to technology and talent optimization, we help private equity firms and their portfolios navigate the changing business landscape and make sure the deals you pursue agree with your disciplined investment thesis, valuation and ROI expectations.

Learn more about how we can help.

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Colin Baker, CPA, CVA, MBA
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Eric Castellano, CPA
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