Economic Uncertainty Including High Interest Rates
Only $2.6 Trillion in Reserves
M&A Deals Plunged 20% Last Year
Smallest Scale Since 2014
Market Revival Hopes Grow Amid Fed's Pivot Signal This Year
Global private equity firms' cash holdings have nearly reached $2.6 trillion, marking an all-time high. Amid uncertain market conditions such as high interest rates and recession concerns, private equity firms have been avoiding participation in mergers and acquisitions (M&A) and initial public offering (IPO) markets, accumulating cash instead. Attention is focused on whether private equity firms, which have been cautious until now, can revitalize the frozen M&A and IPO markets as the U.S. Federal Reserve (Fed) signals interest rate cuts this year.
According to S&P Global Market Intelligence on the 1st (local time), the cash that private equity firms have set aside for investments such as corporate acquisitions was estimated at $2.59 trillion as of the 15th of last month. Of this, 25% is held by the top 25 private equity firms, including Apollo Global, Blackstone, KKR, CVC Capital, and Advent International.
The reason private equity firms' cash holdings have increased to a record high is due to the uncertain economic environment. As uncertainty grew from high interest rates, high inflation, and concerns about economic slowdown, private equity firms hesitated to invest and instead stockpiled cash.
In fact, global M&A deals significantly declined last year. According to consulting firm Bain & Company, the value of M&A deals completed in 2023 is estimated at $3 billion, a 20% drop compared to the previous year and the smallest scale since 2014. Corporate M&A decreased by 14%, and private equity acquisitions fell by as much as 35%.
The Fed's interest rate hikes sharply increased funding costs, raising the burden of corporate acquisitions. Additionally, the widening gap between the prices investors are willing to pay?considering not only a soft landing but also the possibility of a recession?and the prices sellers want has been analyzed as a cause of the sluggish M&A market.
An M&A expert said, "Because it is unclear how asset sales will proceed, the anxiety among private equity owners is significant."
However, with the Fed signaling interest rate cuts this year, expectations are rising in the market that the M&A and IPO markets could revive. It is anticipated that transactions will naturally increase if funding costs fall due to rate cuts and corporate profits rise as inflation slows. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds futures market on this day reflects over a 70% chance that the Fed will lower the benchmark interest rate to 5.0?5.25% at the Federal Open Market Committee (FOMC) meeting in March.
Foreign media analyzed, "Private equity firms will inject cash for M&A and other activities within the next few months while starting negotiations to sell targets they invested in long ago," adding, "As optimism grows that U.S. interest rates, which have risen sharply for decades, have peaked, this movement will accelerate even more."
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