The PE Dilemma
Late last year and early this, several of us were talking about the business climate in 2023. And we were perplexed by the feeling so prevalent in our industry about the economy seemingly so much worse than it was. One of my colleagues remarked that it felt like 2008–2009 only it wasn’t. “Why are so many acting like things are so bad?” he said one day.
The recession that was supposed to happen didn’t. The world didn’t melt down. Inflation more or less began to plateau, albeit still present and with ever-present interest rates still high. But the market got spooked and it wasn’t just secular performance or external threats around technology, regulation or changing business models such as open access or Open AI. Change has been a constant in our industry forever. So, what was going on?
The lights didn’t go on for me, until I read this article.
And sure enough, I realized that a lot of what was going on in our industry had to do with the prevalence of private equity ownership within it. For PE owners, last year was the equivalent to 2008 and 2009. Bingo.
It all made sense. Tech slowed, other sectors softened too — e.g. construction, property. Data, information services, and vertical technology serving those sectors went with it. While some of it started very early in 2023 a jolt hit the system with the meltdown of Silicon Valley Bank and the full court press of Open AI.
Many companies went into a cost-cutting, pencil-sharpening frenzy, often to meet the demands of their PE owners. Top lines softened, ‘playbooks’ were challenged, debt became more expensive, firms were taken off the market or not put on after all. It felt like a perfect storm. For PE owners — last year was a perfect storm.
Part of the weirdness of 2023 was that so many hoped it was the beginning of ‘back to normal’. We’d weathered the pandemic. By the end of 2022 things were opening, people were returning to offices and adjusting to hybrid work models. Travel was back. There was optimism. The Outsell Quarterly Sales Benchmark looked up. And then it suddenly didn’t. By Q2 things were softening and 2023 ended up being a year of cognitive dissonance. We were optimistic, bullish even. We’d weathered the worst, hadn’t we? Whiplash if there ever was.
So, I asked Outsell Corporate Partner investment banker extraordinaire — Wilma Jordan, Founder and CEO, North America, JEGI CLARITY about her take on the article and what’s ahead for 2024:
….barring additional geopolitical craziness……we are more bullish for 2024 than 2023 due to 1) additional private equity dry powder accumulated in past year…some estimates say dry powder increased from $1.5 trillion at the beginning of the year to over $2 trillion to be invested currently 2) the increasing number of companies that PE has held more than 5 years which with the erosion of roi due to the time value of money eroding as time passes, long held companies will need to be sold even if returns are not stellar as with passing time 3) the market adjusting to the higher interest rates and the hope that rates will start to decline……as you saw in the wsj the total value of M&A transactions in the US this year was less than any year in more than 10 years….so fingers crossed!
So, Wilma — I’m with you here. Fingers crossed indeed.
And if anyone out there is looking to buy assets Outsell Consulting Services are ready — whether for sourcing, evaluating an asset and the sector in which it competes, to full on diligence — give us a call. And if you are thinking of selling and want to know more about what it’s like to work with and for PE — give us a call too.