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The macroeconomic backdrop to the private capital market - July 2024

Private Capital Solutions
The macroeconomic backdrop to the private capital market - July 2024

This article considers our views on how certain macroeconomic developments may impact the private capital industry in terms of fundraising and deployment.

Macroeconomic overview

2024 is expected to be a year of government changes and geopolitical shifts with approximately half of the world voting in elections. While some economies and sectors are experiencing recoveries fuelled by technological advancements and green energy investments, others are struggling with debt burdens and stagnant growth.

UK general election

With the UK general election this week, Labour is looking likely to regain power for the first time in 14 years and are currently c.20% ahead in the polls. Labour's platform emphasises economic stability, committing to adhere to disciplined spending plans and avoiding excessive borrowing. Although this addresses concerns regarding Labour’s fiscal approach, this fiscal prudence has limited flexibility, leading to the abandonment of certain pledges, such as the £28bn investment in green industries.

Reshoring supply chains

2024 reflects a strategic rethinking of supply chain management, prioritising resilience, sustainability and quality over the traditional cost-driven offshoring model.1 Covid-19, as well as the Ukraine and Palestinian conflicts have led to increased transportation and logistics costs due to the need for rerouting, increased insurance premiums, and heightened security measures. Rising wages and transportation costs in traditional offshore locations such as China and Southeast Asia have diminished some of the cost advantages of offshoring.2 Shorter supply chains contribute to lower carbon emissions which aligns with corporate sustainability goals and regulatory requirements.

In this context, Mexico has capitalised on the growing US-China trade tension to become the US’s largest trading partner.3 For example, corporations including Dell, Intel and Microsoft have been expanding their footprint in Mexico.4 Some companies are taking a hybrid approach, balancing reshoring with nearshoring and maintaining some level of overseas operations to diversify risks and leverage different regional advantages. Specialised sub-sectors within real estate such as logistics centres, manufacturing buildings, and environmentally friendly infrastructure may be set to experience expansion from this trend.

Interest rates and inflation

Ten year yields
Ten year yields

Source: Capital IQ.

Rising interest rates have eroded debt service capacity and increased financial pressure, although this is yet to reach a tipping point where a large number of firms are no longer able to cover their interest obligations. With inflation coming back down to target levels across Europe, expectations of interest rate reductions in the second half of the year are high. The European Central Bank dropped its benchmark deposit rate by 0.25% on 6 June 2024, signalling the start of this trend. This will reduce the strain on balance sheets and may help stimulate deal activity and fundraising within private markets.

The expectation is for the British pound to appreciate against the US dollar contingent on the Federal Reserve's decision to cut interest rates. The timing of such reductions is shrouded in uncertainty due to persistent inflation in the US caused by the strong labour market and expansionary fiscal stimulus. This inflationary pressure may prompt the Bank of England to adopt a cautious approach to rate cuts, especially if the Fed delays its own. Interest rate disparities are a key driver of exchange rates in the short term, and a lower UK rate compared to the US could lead to a depreciation of the pound, potentially exacerbating import price inflation and jeopardising the central bank's inflation targets.

Impact on private capital industry


Fundraising appetite within private credit is healthy with nearly half of firms having either launched a fund within the last year or intending to launch one in the coming year.5 Although sharp interest rate rises in recent times have been the key driver of private credit’s improved prospects, quicker capital distributions, inflation hedging from the predominant use of floating rates, and diversification have been other considerations. For insurance companies and pension funds, the regular cash income usually received on a quarterly basis allows for better liability matching compared to private equity.

Larger private credit providers are proving to be considerably more active in the fundraising market with 83% of funds with over $5bn in AUM having launched a fund recently compared to 20% in the $500m to $5bn AUM range and only 7% in the sub-$500m category.5 With default rates on the rise, investors are committing to funds that are highly selective in their asset allocation and carefully manage downside risk. Funds that have pursued looser criteria and have developed significant exposure to cyclical industries may face fundraising issues.

Proportion of managers launching credit funds (LTM) by AUM - LTM May 2024
Proportion of managers launching credit funds (LTM) by AUM

Source: Private Equity Wire.

Depressed valuations, sparse distributions to LPs and high macroeconomic uncertainty have led to a reduction in liquidity risk appetite from investors and have constrained private equity fundraising. Riskier segments such as venture capital and real estate have experienced the most difficulty in fundraising. Only 236 (down 37% from the prior quarter) venture capital funds launched globally in Q1 2024, the worst quarter since Q3 2014.6 Real estate also saw its lowest quarterly number of funds launched in over a decade.6 Funds waiting for a return of more favourable market conditions before exiting their current investments and launching new funds may risk being left with stranded assets, having reduced liquidity and opportunity costs.

Deal activity

High interest rates and inflation, which have marked the last 18 months, have begun to stabilise. This has created a cautiously optimistic outlook for H2 2024, with expectations of a more robust M&A market as interest rates peak and economic conditions improve. The focus has shifted towards smaller deals and sectors less dependent on leverage, such as information technology (37% of deals in 2024YTD) and industrial goods (10% of deals in 2024YTD).6 Information technology companies have benefited from the exponential growth of artificial intelligence and being less capital intensive than other industries. The trend towards reshoring and nearshoring production lines has provided M&A opportunities within the industrial sector. Anticipated resilience in earnings and monetary policy shifts may indicate a potential improvement in private equity deal activity, drive higher valuations and lead to an uplift in IPOs. Distributions to LPs could remain sparse in the near term but are likely to accelerate in 2025.

European deal activity - YTD June 2024
European deal activity - YTD to June 2024

Source: Preqin Ltd.

Improved prospects within venture capital

Although fundraising remains challenging, we are seeing a degree of resurgence in the venture capital sector, evidenced by rising valuations and larger deal sizes, particularly at the initial funding stages. This trend reflects a rebound in investor confidence and suggests a more robust startup ecosystem. Notably, pre-seed and early stages in Europe have witnessed the most significant valuation jumps, with median pre-money valuations climbing by 84% (€2.5m in Q1 2023 to €4.6m Q1 2024) and 36% (€7m in Q1 2023 million to €9.5m in Q1 2024), respectively.7 Despite a slight decrease in late-stage pre-money valuations to €10.6m in Q1 2024 (down 5%), deal sizes have grown, indicating sustained investor interest.7 These trends are indicative of a higher calibre of startups attracting investment, characterised by more sustainable cost structures and enhanced operational efficiencies leading to better profitability. Rate cuts expected later this year and economic recovery across Europe and the US should be supportive of further improvements in equity valuations in the venture capital ecosystem.

Growing secondaries market

The secondary funds market experienced a significant surge in 2023, raising 92% more capital than the previous year, driven by the need to address the $3.2tr in unrealized value from 28,000 unsold companies in buyout portfolios.8 This backlog, quadruple the value during the global financial crisis, has led to liquidity challenges in private capital markets, with secondary funds emerging as a vital solution for liquidity. Part of the growth in secondaries may be attributed to the denominator effect experienced where significant drops in public markets led to a fall in the denominator (the total value of the portfolio) and resulted in some LPs being overallocated to alternative investments. Investors who were unwilling to ride out the fluctuation likely used the secondary market to offload some of their positions and recalibrate their asset allocations.

Outperformance of secondaries - indexed returns
Outperformance of secondaries - indexed returns

Source: Preqin Ltd.
Note: Index returns have been rebased to 100 as of December 2020.

Despite the secondary market's relatively small size, providing roughly $120bn in annual liquidity in an industry with over $20tr in assets, its growth potential is exponential due to the increasing complexity of liquidity needs.9/10 The market now offers a diverse array of innovative tools, such as securitisation of positions, direct secondaries, and continuation funds. These not only offer utility but also strong returns with less volatility. Returns in the secondaries market have outperformed other alternative asset classes including private equity, private debt and infrastructure since 2020.6 The increased accessibility of private assets could lead to a reduction in liquidity premiums. As the industry adapts to changing exit channels, the role of secondary funds is poised to expand.

Sector spotlight


Telemedicine has experienced impressive development and growth, driven by the increasing demand for accessible and convenient healthcare solutions. The telemedicine sector is projected to grow at an annual rate of 24% over the next five years.11 Advances in digital health technologies, including high-quality video conferencing, secure patient data management systems, and AI-driven diagnostic tools, have significantly enhanced the effectiveness and reliability of telemedicine. The growth potential of HealthTech is represented in the high average EV/EBITDA multiples of c.35-40x seen in the industry over the last few years. EBITDA margins have remained relatively low despite substantial revenue growth. This may be due to significant R&D expenditures, high regulatory compliance costs and investment in customer acquisition to scale the businesses.

HealthTech - sector multiples and margins
HealthTech - sector multiples and margins

Source: Capital IQ.
Note: Analysis based on a selected group of publicly listed healthcare technology companies that we consider to be broadly representative of the market.

The United States alone has the capacity to shift approximately $250bn of its existing healthcare spending to virtual platforms.12 Private capital has been flowing into the HealthTech sector in recent years with over 700 deals at an average deal size of $29m in 2024 so far, largely from venture capital strategies (Seed, Series A and B).6 Despite a slowdown in global SPAC (Special Purpose Acquisition Companies) activity, late-stage healthcare companies with significant growth and visibility, including Butterfly Network, Carmell Therapeutics, and QT Imaging, have opted for SPACs as their preferred exit strategy.13/14 SPACs offer a shortened timeline compared to IPOs, greater price certainty with valuations typically negotiated upfront, reduced exposure to market volatility and lower underwriting fees.

Electric Vehicles

Breakthroughs in battery technology have significantly increased the range and reduced the cost per kilowatt-hour, making EVs more competitive with traditional internal combustion engine vehicles. The price of EV battery packs is expected to fall by 11% per year to 2030 and EV cost parity with internal combustion engine vehicles is forecasted to be achieved around 2025.15 Lithium-ion batteries have become the cornerstone of modern EVs due to their high energy density and declining cost curve. However, there is pressure to develop alternative battery chemistries due to the limited availability of lithium.

Governments around the world have introduced various measures, such as tax rebates, grants, and investments in charging infrastructure, to encourage transition to electric mobility. For example, the EU’s Alternative Fuels Infrastructure Regulation (AFIR) mandates fast-charging stations at least every 60 kilometres along the trans-European transport network, ensuring widespread and consistent charging availability.16 However, the effects of broader political fragmentation and deglobalisation can be seen in the sector. For example, the European Union recently announced plans to impose additional tariffs of 17-38% on imported Chinese EVs due to concerns surrounding possible unfair state subsidisation.17

Private equity investments in the EV sector are driving significant advancements in technology, infrastructure, and market penetration. PE firms are attracted to the sector due to its high growth potential, the global push towards sustainability, and the opportunity to shape the future of transportation. For example, luxury electric vehicle maker and Tesla rival, Lucid Motors, went public via a SPAC merger in May 2024. The deal included a private investment of $2.5bn from Saudi Arabia’s Public Investment Funds, BlackRock and others.18

Notable private equity investments related to Electric Vehicles
Notable private equity investments related to Electric Vehicles

Source: GlobalData Power Intelligence Center.

The transition to EVs as a mainstream mode of transportation will require substantial infrastructure investment including in public charging stations, electricity grid upgrades, battery production plants and battery recycling facilities. Improvements in renewable energy integration will also be necessary including further investments in solar and wind energy sources and enhancing energy storage solutions to manage intermittency issues. According to the Global Infrastructure Hub, the mismatch between the amount of capital needed to provide essential infrastructure globally and projected investments will reach $15tr by 2040. Private capital allocations to this area benefit from stable cash flows and non-cyclicality due to long-term government contracts, limited competition as projects are capital-intensive and the secular trends driving growth likely ensuring that this momentum remains.

  1. Supply Chain 2024,S&P Global.
  2. Reshoring,restructuring, and the future of supply chains, MIT Sloan School of Management.
  3. Top Trading Partners - April 2024, United States Census Bureau.
  4. Forbes, Intel Corporation and Microsoft.
  5. Private Credit in 2024 and Beyond, Private Equity Wire.
  6. Preqin Ltd.
  7. Q1 2024 European VC Valuations Report, PitchBook Data, Inc.
  8. Have Secondaries Reached a Tipping Point?, Bain & Company, Inc.
  9. January 2024: The Next $20 Trillion in Alternative Investments, Chartered Alternative Investment Analyst Association.
  10. Secondaries Investor.
  11. Grand View Research, Inc.
  12. The next frontier of care delivery in healthcare, McKinsey & Company.
  13. Business Wire,Inc.
  14. Private equity powers digital healthcare revolution, First Republic Bank.
  15. Electric vehicle battery prices are falling faster than expected, Goldman Sachs.
  16. Council of the European Union.
  17. European Commission.
  18. Tesla rival Lucid Motors to go public in $24bn mega SPAC deal, Private Equity Insights.
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