EXCLUSIVE: In Private Equity Revival In 2024, Those Who Understand AI Will Win

The private equity environment has changed.

Gone — at least for the medium term — is the era of low interest rates and the days of highly leveraged deals. Funds must now refocus on value creation in their portfolios.

These were the findings at a conference for the private equity industry in June 2023 and are likely to remain the PE investment themes of 2024, according to Beringer Capital, a PE firm based in Toronto, Canada.

The industry set a record-breaking pace in the post-financial crisis decade, but the surge in demand for goods during the Covid pandemic resulted in supply chain bottlenecks that quickly fanned the flames for inflation.

The global central banks’ collective response to rising prices? Higher interest rates. As rates moved higher, access to cheap funding to finance PE deals was more scarce, which caused activity in the mergers and acquisitions market to fall sharply.

“The combination of credit tightening and valuation mismatches made 2023 an interesting year that rippled across M&A activity, fundraising, exits, and restructurings,” said MorganFranklin Consulting in its Private Equity Review of 2023.

Value Creation Will Be Key

Beringer recognizes that risks remain, even though interest rates are expected to be cut this year.

“High leverage” — the rate of funding to finance buyout and other investment deals — “is creating losers, not winners,” says Beringer.

“Economic and interest rate conditions are putting many portfolio companies and funds at risk of failure,” the company adds.

It contends that PE companies with the strongest balance sheets will outperform. And lenders, following the bank failures of 2023, have pulled back significantly from the PE market.

Also Read: AI, Biotech, Energy Sectors Expect M&A Revival For 2024

The top funds are focusing on value creation.

This, Beringer says, utilizes industry advisors more effectively, using leverage of 3x or lower, making investments in high-margin companies with strong cash flows and making more earnout deals — where the pricing of a deal is dependent on the acquisition’s future earnings.

“It's all about risk-adjusted investing,” says Beringer. “Lenders are consolidating and reallocating capital to
funds with strong track records and more conservative approaches on financing.”

New Opportunities With AI

As other financial services companies gravitate toward artificial intelligence to aid decision making, so too will private equity, with funds investing in digital transformation projects to reduce costs, increase efficiencies and improve margins.

“AI is creating new opportunities and those who understand it will win,” says Beringer.

Finally, Beringer believes that alternative financing is thriving, creating a “rare opportunity” in direct lending — where firms with strong balance sheets and cash flows lend direct to companies that need financing, bypassing intermediaries.

“Direct lenders are meeting the needs of the market due to fewer financing constraints and the availability of dry powder,” it says.

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Disclosure: Beringer Capital is the majority stakeholder in Benzinga.

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