The private equity M&A market in the first half of 2024 exhibited a blend of growth and challenges. While dealmaking activity has seen an increase compared to previous years, the market still grapples with higher borrowing costs, adverse macroeconomic conditions, and geopolitical uncertainties.

This report delves into the key trends shaping the PE landscape, shifting activity towards alternative exit options requiring additional fiduciary and legal considerations.

PE M&A Market Trends

Private equity sponsors have increasingly utilized alternative transactions to provide liquidity and distributions to limited partners as the broader M&A market remains subdued in its recovery. While M&A activity in 2024 has been moderate, dividend recapitalization transactions and GP-led secondary transaction volumes are at or near record levels.

These transactions present additional governance considerations for portfolio company boards and their private equity sponsors. Sponsors and boards need to be mindful of their fiduciary duties and follow best corporate governance practices as they explore these alternative liquidity events, as LP scrutiny of transactions remains in the forefront. Solvency opinions in dividend recapitalization transactions and fairness opinions in GP-led secondary transactions help mitigate these heightened corporate governance risks and provide support to company boards, fund sponsors, and their limited partners that they are following their fiduciary duties.

Increased Dealmaking Activity

While private equity dealmaking activity in the first half of 2024 increased by approximately 12% in terms of both volume and deal value, activity levels are below comparable periods in 2021 and 2022. Higher borrowing costs, difficult macroeconomic conditions, and uncertainty brought on by both domestic political uncertainty in an election year and the global geopolitical environment have contributed to a muted recovery in private equity dealmaking activity.

Valuation Pressures

These challenging conditions have pressured valuations, creating a valuation gap between buyers and sellers, making bringing an asset to market more difficult.

While funds are sitting on record levels of capital, the share of buyout transactions relative to all private equity deals has continued its slide since 2014, where it stood north of 30% versus under 20% in 2024. High-quality businesses are stand-outs, seeing high levels of buyer competition, narrowing the valuation gap between sellers and buyers, and allowing some platform deals to be completed.

Add-On Activity

Add-on activity continues to take a greater share of overall private equity activity, growing from approximately 50% in 2014 to over 77% in 2024. Private equity sponsors continue to look to add-on acquisitions as a strategic tool to create value and increase efficiencies within their portfolio companies. This goes hand in hand with private equity sponsors lengthening holding periods. Private equity sponsor hold times have continued to increase, with median exit hold periods reaching over seven years in 2023.

In a recent interview with Middle Market Growth, Stout’s Rudi Moreno provides a perspective on value creation during long hold periods.

Limited Partner Pressure

This environment of lengthening hold periods has increased pressure from limited partners to return funds to allow them to diversify their holdings and invest in new managers. In a recent ILPA survey, only 17% of limited partners reported being satisfied with the pace of distributions from private equity funds, with 37% reporting dissatisfaction.

Alternative Liquidity Strategies

In the context of this muted M&A environment for a traditional exit, private equity sponsors have increasingly been relying on other alternatives to gain liquidity for LP’s, including dividend recapitalization transactions, secondaries transactions, private IPOs, and fund-level financing.

Dividend Recapitalization Transactions

In 2024, dividend recapitalization transactions have seen a notable resurgence, driven by various market dynamics and strategic considerations. Below, we explore the key factors and trends influencing this resurgence.

Resurgence in 2024

The use of dividend recapitalization transactions tends to fluctuate based on the health of the credit markets and in reaction to potential changes in the tax environment. The last two years were characterized by increasing interest rates, putting pressure on new debt issuances and in turn dividend recapitalization transactions.

Against a backdrop of high borrowing costs and macroeconomic and geopolitical uncertainty, it’s been somewhat of a surprise to see a resurgence of dividend recapitalization transactions in 2024. Sponsors have been using dividend recapitalization transactions as a method of acquiescing to LP demands to return capital while continuing to work on creating value at the portfolio company level and for valuation gaps to recede for a later traditional exit.

Leveraged Loans and High-Yield Bond Activity

Through the end of the third quarter, dividend recap volumes have already surpassed 2021’s record levels. Leveraged loans remain the primary method for private equity portfolio companies to execute dividend recapitalizations, with over 80% of dividend recapitalization transactions funded with leveraged loans. Leveraged loans have accounted for solid majorities of dividend issuance in each year since the Global Financial Crisis.

Overall, private equity sponsors have extracted $26.4 billion via dividends financed in the leveraged loan market in the year to Sept. 27, nearing the $26.7 billion for the comparable period in 2021, and already exceeding full-year volumes for all years since 2019 except 2021.

Dividends paid to PE sponsors via leveraged loan market ($B)

High-yield bond dividend recapitalization activity has also rebounded in 2024. Private equity backed companies represent over 70% of the volume of high yield bond back dividends, the highest share since 2014.

Dividend recap HY bond ($B): Jan1-Sept 30

Stabilization of Borrowing Costs

Aiding the heightened level of dividend recap activity in 2024 is the stabilization and recent decline in borrowing costs, both in terms of new-issue yield as well as new-issue spread. Both are at or near recent lows and provide a healthy backdrop for continued new issuance activity through the remainder of 2024 into 2025.

Average new-issue yield vs. average new-issue spread, secured

Average new-issue yield vs. average new-issue spread, unsecured

Addressing Heightened Corporate Governance Risks With Solvency Opinions

Dividend transactions, especially those funded through additional debt obligations, present a heightened corporate governance risk. If the issuer were to face financial trouble after the dividend recapitalization transaction, creditors may claim that the dividend recapitalization transaction rendered the company insolvent and was a fraudulent transfer or fraudulent conveyance. Successful fraudulent transfer claims have the potential of unwinding the transaction in question, even years after the transaction was completed. Shareholders may have to repay dividend proceeds and directors may face significant personal liability.

Solvency opinions are designed to protect board members from these increased risks and are evidence of a board’s discharge of its fiduciary duty of care. A solvency opinion provides support and confidence to key stakeholders that the company can continue servicing debts and perform ongoing operations and that the deal will not result in a fraudulent conveyance. A solvency opinion from an expert like Stout can assist corporate directors in carrying out their fiduciary duties and following best practice in corporate governance.

GP-Led Secondary Transactions

Secondary transactions have become an increasingly popular method for providing liquidity to limited partners. Below, we explore the key trends, benefits, and complexities of secondary transactions in the private equity market.

The role of secondary transactions as a means of providing liquidity to limited partners continues to grow, with many in the industry believing the market is still in the early innings of growth. The secondary transaction market is generally split into two categories: LP-led secondary transactions and GP-led secondary transactions.

In an LP-led secondary transaction, a limited partner will sell their commitment in a fund to a secondary buyer. In a GP-led transaction, the sponsors decide which asset or pool of assets will be transferred from one vehicle into another vehicle, commonly known as a continuation fund. Limited partners will typically be given an option to either roll-over their interest in the assets to the new fund or be cashed out.

Benefits of Secondary Transactions

Secondary transactions provide several benefits for each of the parties involved. For limited partners in existing funds, secondary transactions allow for a way to generate liquidity and rebalance a portfolio. Investors in GP-led secondary transactions have enhanced transparency into the underlying asset and may benefit from a track record of proven ongoing sponsor-led value creation activities on the underlying asset with a potentially shorter hold period until liquidity.

From the sponsor’s perspective, GP-led secondary transactions allow them to retain control of an asset for a longer period, driving value-enhancing strategies, all while continuing to earn asset management fees and potentially crystalizing a portion of their carry.

With this backdrop, it’s no wonder that investment funds are raising record amounts of capital specifically targeting the secondaries market and transaction volumes are expected to reach record levels in 2024.

Market Trends and Volume

After a sluggish 2022, secondary transaction volumes recovered in 2023, with total volume growing approximately 4%, paced by LP-led secondary transactions growing 7%. In the first half of 2024, secondary transaction volumes have exploded higher, with total volume growing 58% versus the first half of 2023. LP-led secondary transaction volume continued to lead the pace, though GP-led secondary transaction volumes also grew a robust 56%. The table below highlights recent annual transaction volume as well as Jefferies’ estimate for a record 2024 year in the secondaries market.¹

GP-Led Market Expansion

The GP-led secondary market continues to expand as adoption of the continuation fund vehicle as an exit alternative becomes more mainstream. According to data from Jefferies, continuation fund exits have increased as a percentage of total sponsor-backed exit volume from approximately 5% in 2021 to 14% in 2024.

Fundraising and Capital Deployment

On the fundraising side, $51.3 billion was raised by funds focused on investing in GP-led secondaries in the first half of 2024. These new funds, along with the record-breaking $221.7 billion of secondaries-focused funds that were available to deploy on December 31, 2023, point to a continued favorable environment for sponsors to achieve liquidity through the secondaries market.²

Secondaries fundraising activity

Secondaries dry powder ($B) by vintage

Addressing Complexity and Governance Issues With Fairness Opinions

As the use of GP-led secondary transactions continues to grow and evolve, the structures have become increasingly complex, requiring careful consideration of potential pitfalls to ensure a successful transaction. Continuation vehicle transactions are inherently conflicted transactions, as both the selling fund and buying fund are entities controlled by the same private equity sponsor. This creates governance and process issues that need to be carefully considered and addressed early in the transaction process with proper planning and preparation.

One tool that sponsors and their advisors have at their disposal to mitigate this risk is to engage an independent valuation advisor to provide a fairness opinion in connection with the transaction. A fairness opinion directly addresses the valuation underlying the transaction and states whether the proposed transaction is fair from a financial point of view.

An independent fairness opinion from an experienced expert like Stout can help bolster the record and protect the sponsor from those who may wish to challenge the transaction in hindsight.

1. “H1 2024 Global Secondary Market Review: July 2024,” Jefferies, 2024.
2. Pitchbook Q2 2024 Global Private Market Fundraising Report