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How can private equity firms break new ground for their portfolios?
Global M&A activity has rebounded in 2024. Markets worldwide responded positively in the short term to Donald Trump's election, and the US Federal Reserve cut interest rates again in November by 0.25 percentage points. Similarly, the Swiss National Bank (SNB) reduced interest rates by 50 basis points on December 12, 2024. The global economy is expected to gradually recover in 2025, with the OECD Economic Outlook (12/2024) projecting slightly lower GDP growth for the US (+2.4% GDP) compared to 2024, while the Eurozone (+1.3% GDP) is expected to see moderate growth. Germany is forecasted to experience the lowest growth among Eurozone countries (+0.7% GDP). In Switzerland (+1.5% GDP), a silver lining is visible on the economic horizon. The economic recovery should continue worldwide in 2026.
Key Takeaways
How many deals took place?
According to PitchBook's Global M&A Report (Q3 2024), global M&A activity recovered strongly in the first nine months of the year. The transaction value increased by 27.6% and the number of deals by 13.3% compared to the same period last year. M&A activity in Switzerland has also developed positively since mid-2024.
Private equity (PE) acquisitions increased in particular due to lower interest rates, better conditions for credit financing and a considerable amount of dry powder. The value and number of PE acquisitions in Europe increased by 27.5% and 11.5% respectively compared to the previous year.
Why were there fewer exits?
By contrast, the number of PE sales transactions in Europe is expected to fall by -11.5% year-on-year. Primarily due to low growth and reduced profitability, the multiples for PE portfolio companies have come under pressure, which has led to a lower number of exits. The strategy of acquiring a company at a favorable price and enriching it with a few add-on acquisitions is no longer a guarantee for a timely increase in value. Instead, targeted measures to increase the value of portfolio companies must be identified and consistently implemented in order to achieve the targeted returns on exit.
How can PEs break new ground for their portfolios?
In order to achieve an attractive sales price in the current exit environment, improvements in operating performance must be initiated or strategic carve-outs must be considered.
Operational performance improvements
Ways to increase efficiency and profitability can be found through improved financial management. For value-based management of the portfolio companies, it is primarily important to achieve transparency in the relevant management dimensions for financial value creation. Financial value creation for products, customers and markets must be measured on the basis of economic profit and free cash flow and consistently managed using the respective value drivers. Benchmarks can help to formulate realistic ambitions for growth, cost and capital efficiency. In addition, detailed business plans allow for long-term growth and efficient monitoring of the portfolio to identify necessary divestments.
Read the IFBC blog "Increasing profitability" by Christian Hirzel and Noel Sager on the subject of "Value-based management".
Strategic carveouts
Divesting parts of the business is a strategic option worth considering. By selling an underperforming division and concentrating on the core business, an increase in value can be achieved and funds can be freed up for investments or debt reduction. In addition, the management can focus on the competitive advantages and present itself more attractively to investors or potential buyers through a comprehensive repositioning.
Read the IFBC interview with Gerold Brütsch, CFO of the CPH Group, which recently successfully executed a spin-off, on the topic of "Strategic Carveout".
Sources: PitchBook, OECD Economic Outlook, December 2024.
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