Middle-market transactions are powering a rebound in exits as private equity-backed IPOs track for their best year since 2021.

Buyout funds tallied 1,700 exits this year through end of the third quarter, a total 10% higher than the 1,530 exits through recorded in the same period a year ago, according to an S&P Global Market Intelligence analysis of Preqin data. Private equity-backed IPOs and private placements, a related exit route, totaled 155 through three quarters of 2024, just one deal shy of the full-year 2023 total.

Private equity's rising exit count comes with a caveat: the size of the average deal shrank to $477.73 million over the first three quarters of 2024, down 36.7% from the 2023 average of $754.78 million, according to Preqin data.

Declining deal size indicates smaller deals in the middle market are driving exits, said Kevin Desai, private equity leader for PwC's advisory business.

"The ability to get things done at the large-cap size is a little bit harder. The quality of the assets we're seeing is not as strong, and they're spending a lot more time on carveouts than whole [company] sales," Desai said.

IPO window

With a looming US presidential election injecting fresh uncertainty into public markets, it may be some time before big-ticket private equity-backed IPOs return in force, said Jeremy Swan, managing principal in advisory CohnReznick's financial sponsors and financial services industry practice.

But the growing number of firms testing the IPO waters "bodes well" for the large-cap private equity (PE) firms and tech-focused investors most likely to choose that exit route, he added.

The IPO window continued to widen in third quarter, with buyout funds taking 44 companies public on global exchanges, according to Preqin data. That was the industry's highest quarterly IPO total since fourth quarter 2021, as well as an 18.9% jump over the 37 PE-backed IPOs recorded in second quarter 2024.

Exit momentum overall, however, appeared to slow in third quarter. The data tracked 576 exits globally in third quarter compared to 574 in the second quarter.

Aggregate value across all exit types was essentially flat as well, rising to $96.1 billion in the third quarter from $94.9 billion in the second quarter.

Hold periods extend

The challenges of divesting assets in the current economic environment are also reflected in another data point: lengthening portfolio company hold times.

The average holding period of private equity portfolio company investments exited in the first three quarters of 2024 was 5.9 years, according to Preqin. That compares with an average holding period of 5.5 years over the decade leading up to 2024.

The shift to a higher-for-longer interest rate environment means private equity can no longer ride a rising tide of corporate valuations, Bain & Company noted in its midyear private equity report. Instead of relying on multiple expansion — a significant source of value creation during the many years of low interest rates that followed the 2008 financial crisis — PE fund managers must refocus on creating value by improving portfolio company profit margins and revenue.

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Value creation is a costlier and more time-consuming path to a profitable exit, Desai said.

"You have to drive more organic growth, which is a different value proposition for PE," he said.

Top exits

The largest exit completed in the third quarter was the $12.4 billion deal that saw Lime Rock Partners LLC-backed oil and natural gas company CrownRock LP acquired by Occidental Petroleum Corp.

The largest exit since Jan. 1 remains the $28.5 billion acquisition of private equity- and venture capital-backed cybersecurity firm Splunk Inc. by Cisco Systems Inc. Private equity investors on the sell side of the transaction included Hellman & Friedman LLC and Silver Lake Technology Management LLC.

Pressure building

Swan predicted higher levels of exit activity through year-end as fund managers work to return more capital to their limited partners. A slowdown in distributions to limited partners has disrupted the private equity investment cycle and hampered fundraising in recent years.

"The expectation is that there will be a considerable number of exits in Q4 to start returning some of that capital to the LPs before year-end or close to year-end to prep for the next fundraising cycle. The message that's being delivered is 'If you're not returning capital to us, that conversation about that next fundraise is going to be a very difficult one,'" he said.