Private equity investments into startups in 2024 are predicted to see significant strategic shifts, including the rise of continuation funds, longer holding periods due to the challenging exit environment, and an increase in founder-owned company deals, according to the 2024 U.S. Private Equity Outlook report published today by PitchBook Data Inc.

The report comes as 2023 saw PE activity falling to unprecedented lows relative to the industry’s capital under management. U.S. PE assets under management were just shy of $3 trillion entering 2023, with firms only since having invested $227.2 billion in holdings based on the deal value of exited companies, or 7.6% of the beginning value. The figure is worse than during the global financial crisis in 2009, when it was 11.3%.

With exits still hard to come by given ongoing macroeconomic issues, inflation and global conflict, the report predicts that there will be a new “third rail” of general partner secondaries, otherwise known as continuation funds. The funds provide liquidity to limited partners and time for GPs simultaneously and are also scalable.

The strategy is backed by $68.1 billion in fundraising in the third quarter of 2023 — more than the $57.6 billion raised for all of 2022 — adding to the $202.7 billion in dry powder accumulated through the first half of 2023. Although some funds will go toward buying LP stakes directly, most will use continuation funds to speed deployment through large bulk transactions.

In 2024, tech-focused PE funds are predicted to outperform more diversified funds. The prediction comes from examining historical trends starting from the first quarter of 2010, revealing that tech-focused PE funds have outperformed with an average excess of 580 basis points and a median outperformance of 447 basis points, based on a one-year rolling internal rate of return.

The prediction flies in the face of recent history, with the last six quarters seeing tech-focused funds faltering amid market corrections, surging interest rates and fears of a recession. Those economic issues, particularly interest rates and inflation, are predicted to soften in 2024. Thus, the report suggests, there is “fertile ground for PE managers skilled at enhancing the operational efficiency of tech companies” and “a window for potential valuation expansion in the software sector.”

However, PE funds will face other issues in the year ahead. Among them is an existing problem: low distribution levels, with buyout fund distributions sitting at just 14.6% of the beginning net asset value, significantly lower than the long-term average of 26.5%.

The reduced level of distributions is expected to hurt buyout fundraising in 2024,. The report suggests that buyout fundraising could fall about 30% below its current linear trend, marking the slowest pace of fundraising since 2019 on a nominal basis and, considering longer-term trends, the slowest since 2010.

The low distribution levels are driven by a lack of buyouts and public listings, with exit activity plummeting since early 2022. The report notes that PE firms tend not to be forced sellers and choose instead to hold promising assets for longer until market conditions improve.

The trend of long holding periods is expected to hit new records in 2024 as the exit environment remains weak. “With interest rates expected to stay elevated for the foreseeable future, we expect PE firms to continue to postpone selling and extend portfolio company holding periods in the process,” the report states.

The market conditions will also lead to a continuing rise of founder-owned company deals in private equity buyouts. Some 56% of all U.S. PE buyouts involved founder-owned companies, and this percentage is expected to rise even higher.

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