For almost two years, the volume of buyouts, exits, and fundraising has been shrinking: Private equity is at a standstill. The industry is now under increasing pressure to find ways to return more capital to its institutional investors. If not, these "limited partners" might become more reluctant to invest in new funds. Moreover, due to the stock market correction, many institutional investors have already reached or exceeded the self-imposed or legally mandated caps on the share of private equity investments in their total assets. According to Bain, fundraising has decreased by 30% in 2023.

But how can financial investors monetize their corporate stakes in an high-interest environment without compromising on valuations? The yield for high-grade ten-year government bonds has risen to 5%, making it more difficult and expensive for potential buyers to finance deals. Instead of passing on entire companies, private equity funds are increasingly leveraging their corporate portfolios with so-called net asset value securitizations, allowing them to temporarily repay a portion of their investment to investors. Proceeds from IPOs or the sale of corporate stakes from private equity portfolios have shrunk to $584 billion this year, as stated by Pitchbook, which is $100 billion less than during the same period in 2022 – and almost two-thirds less than in 2021.

Exiting through the stock exchange has become extremely challenging. In Germany, there were only three major IPOs this year. All three – Ionos, Thyssenkrupp Nucera, and Schott Pharma – did not come from private equity portfolios but were subsidiaries of large corporations. IPO investors have grown weary of investing in companies from financial investors' hands as their performance has been consistently poor in recent years. DKV Mobility, a fuel card provider in which CVC is involved, had to abandon its IPO plans for this year after the armored gear manufacturer Renk, a portfolio company of the financial investor Triton, halted its debut at the very last moment. Similarly, Birkenstock (L Catterton) made a poor impression when it started trading in the US.

Consequently, M&A remains the only option for exits. However, many private equity firms are ruled out as buyers due to their inability to secure substantial financing from banks as they have been burned several times during syndication. It also highlights the importance of cheap external capital in fueling the boom and profitability of private equity. Strategic buyers can only partially fill the void. Recent noteworthy cases in substantial German exits include the 1.6 billion euro medium-sized firm EA Automation from Bregal's portfolio, which is affiliated with the C&A family Brenninkmeijer – or CVC's lucrative exit from the industrial gas company Messer.

Meanwhile, major top funds such as Clayton Dubilier & Rice, KKR, and Apollo are holding a vast pool of uninvested capital commitments – commonly referred to as "dry powder" – amounting to $1.1 trillion. This substantial reserve leaves them with little patience to wait for better opportunities. They are reviewing their portfolios, redefining their value-creation plans, and are striving to revive their activities. Nevertheless, these efforts alone don't justify a 2% management fee. The situation is unsustainable. Eventually, the pressure to invest will have to translate into actual deals.

Perhaps that time has not yet come. After a year of sharply rising interest rates, a banking crisis, and geopolitical turbulence, it is not surprising that private equity activities are plummeting in 2023. Uncertainty is the enemy of deals, and there has been plenty of uncertainty in the markets. The war between Israel and Hamas, highly volatile bond prices, and economic downturns are not making exits any easier.