Limited partner investments, including direct stakes and coinvestments with private equity, fell in 2023, mirroring the plunge in deal activity that resulted from unfavorable macroeconomic conditions.
The annual entry value for limited partner (LP) investments stood at $40.30 billion at the end of 2023, down 28.7% from $56.54 billion in 2022, according to S&P Global Market Intelligence.
Direct investments dipped 61.9% year over year to $10.81 billion, while LP coinvestments with private equity firms were up slightly on an annual basis to $29.49 billion.
In the first quarter of 2024, total LP investments amounted to $1.76 billion. Coinvestments with private equity totaled $1.63 billion, while direct investments stood at $128 million.
LPs favor caution as headwinds converge
The muted deal environment, characterized by high interest rates, hefty valuations, increasing bid-ask spreads and heightened regulatory scrutiny, pushed LPs to be more cautious in 2023, said Rahul Thakur, director for private markets at financial research provider Acuity Knowledge Partners.
Since 2019, institutional investors have been facing multiple cashflow issues arising from overallocations, the denominator effect and a slowdown in fund distributions, Vicky Forrester, partner at corporate law firm Paul Weiss Rifkind Wharton & Garrison, told Market Intelligence.
"Distributions to all private equity investors as a percentage of NAV fell to 11.2% in 2023, well below the median of 25% across the last 25 years," Forrester said, citing data from Raymond James Financial Inc. "As a result, less money was available for investment on the LP side."
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TMT, financials grab LP attention
Between 2019 and 2024, the primary sector for LP investment has been technology, media and telecom (TMT), with 515 announced deals. Not far behind is the financial sector, with 476 deals.
In 2023, financials led the way on LP entries, with 76 deals, most of which were in the asset management subsector, which landed 65 transactions. The TMT sector recorded 72 announced deals in the past year.
Biggest deals
Canadian LPs were involved in six of the top 10 deals in 2023.
Seven out of the 10 biggest LP investments in 2023 were with private equity firms. In the biggest deal, Silver Lake Technology Management LLC and Canada Pension Plan Investment Board acquired software company Qualtrics International Inc. for $10.45 billion.
The second-biggest deal was the planned acquisition of broadband and business communication solutions provider Consolidated Communications Holdings Inc. by British Columbia Investment Management Corp. and Searchlight Capital Partners LP for $2.81 billion.
Outlook
Deal activity will likely pick up as LP concerns about a significant buildup in unrealized value could pressure private equity firms to exit investments and deliver returns.
"The financing and IPO markets are starting to open up, which may lead to improving deal activity," said Thakur with Acuity Knowledge Partners.
Paul Weiss' Forrester believes institutional investors will continue to build exposure to private equity, particularly regarding buyout funds, growth strategy funds and secondaries funds. LPs will likely prefer familiar managers with a track record, so less established general partners or those raising funds with new strategies may have a more difficult time raising capital.
Indeed, the factors most important when an LP evaluates investment in a private equity fund are the investment strategy and focus and the track record of the general partner, according to more than 70% of LPs surveyed in the upcoming S&P Global Market Intelligence 2024 Private Equity and Venture Capital Outlook.