Private equity exit value is on track to decline to its lowest annual total in at least five years despite signs that the IPO window is reopening.

Global private equity exits totaled $155.3 billion between Jan. 1 and June 30, down 26% from $209.4 billion in the first six months of 2023, according to Preqin data. Annual exit value is on track to fall annually by roughly one-third from 2023's $460.3 billion full-year total.

The bright spots include signs that the IPO market is reopening as an exit route for private equity and venture capital portfolio companies. The value of private equity-backed IPOs topped $10 billion in both the first and second quarters, the first time that has happened in consecutive quarters in more than two years, according to Preqin data.

"One area that we've seen a real pickup is the ability to try to exit through public markets," Jon Winkleried, CEO of TPG Inc., said in June, just weeks after TPG-backed cruise operator Viking Holdings Ltd. debuted on the New York Stock Exchange.

Persistent uncertainty

Private equity exit value sunk to a three-year low of $64.8 billion in the first quarter but rebounded in the second quarter, rising 40% quarter-over-quarter to $90.5 billion, according to Preqin data.

Persistent macroeconomic uncertainty remains a key factor in muted private equity exit activity, making it difficult for buyers and sellers to agree on a fair valuation for a business, said Paul Aversano, a managing director at M&A advisory Alvarez & Marsal.

Cooling inflation and a potential reversal of high interest rates are priming M&A markets for more private equity-backed deal activity, but geopolitical instability and the looming US presidential election are raising big question marks for dealmakers.

"We have two candidates in the US who couldn't be further apart on fiscal and monetary policy. Until you know what direction we're going to go in, people just wait," Aversano said.

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Aging investments

Private equity investments made in the exuberant runup to 2021, private equity's record year, are also taking longer than expected to produce an acceptable return for fund managers, Aversano said.

"Many of these firms are probably holding these investments, hoping to kick the can down the road for better days," he said.

The average buyout fund portfolio company investment was 5.7 years old as of July 11, according to Preqin data, which means those businesses were acquired in late 2018. Since then, Aversano noted, the hurdles to creating growth at portfolio companies have only increased as slower economic growth hampers business performance.

"The days of financial engineering — buy low, sell high — are long gone. Now, all these private equity firms have to actually do things to create value in the portfolio. That takes time," he said.

Largest exits

The $28.5 billion acquisition of cybersecurity firm Splunk Inc. by Cisco Systems Inc., completed in March, was the largest private equity exit of the first half. Splunk investors included private equity firm Hellman & Friedman LLC.

Trade sales, when a portfolio company is sold to a corporation often in the same industry, are the "holy grail" of private equity exits because corporate strategic acquirers tend to pay higher valuations, said Daniel Malone, a Haynes Boone private equity attorney and managing partner of the firm's Denver office. But strategic sales can be slower to close on transactions than private equity firms that are built to churn through deals, Malone added.

The slow deal closing may be one reason exits via secondary transactions spiked to a 10-quarter high of $44.1 billion in the second quarter. Fund managers, under pressure to exit and return cash to investors, are finding the clearest path to an exit leads to another private equity fund.

"You can get a much quicker and more fluid transaction done with people who are speaking the same language," Malone said.