Last year saw record capital deployment from local private equity firms, but this year is shaping up to correct back to pre-pandemic investment levels.
Private equity boomed in the past decade with the entry of boutique, industry-specific firms that attracted investors by pitching the ability to transform middle-market companies. The largest entities in the area have swelled to become one stop shops for investors such as endowments, sovereign wealth funds and pension plans.
Now, after historically high interest rate hikes and seesawing economic outlooks, deal volume and value in the Los Angeles private equity sphere took a sharp decline this year.
As of mid-October, 454 deals were completed by L.A.-based PE firms. The total for the year will likely come in well below last year’s 790 deals. The data is from Pitchbook, a financial data platform.
The investments this year have also decreased in value – as of October local firms tallied up $50 billion in activity. Again, that’s likely to come in well below last year’s $144 billion.
This year’s dip could be seen as a correction of the post-pandemic’s spending spree when private equity firms had previously racked up billions in capital from limited partners with the discretion to hold off on spending.
Rising costs
Uncertain economic outlooks and rising transaction costs due to high interest rates act as deterrents for an industry that became an investor darling in its commitment to maximizing returns through years-long horizons.
Los Angeles isn’t alone in its market correction. In a midyear report the accounting firm PwC LP found deal volume slumped 30% early in the year compared to last year’s early quarters.
Top private equity firms in the region, while not totally closing the deal valve, continue to wait on the sidelines as the gap between seller valuation and buyer hesitancy remains wide.
Ares Management Corp., the largest private equity firm in Los Angeles, reported $104.6 billion of available capital in its October third-quarter earnings, nearly a quarter of its total $394.9 billion in total assets under management. In the third-quarter earnings call, Ares Chair and Chief Executive Michael Arougheti revealed that despite the slowed transaction activity, the firm had its second-highest fundraising quarter in its 26-year history.
“For 2024, we currently expect market activity to improve due to the aging private equity dry powder that is approaching the end of its investment period, growing pressure from LPs (limited partners) to return capital, stronger sentiment among middle market companies and further pressure on balance sheets and capital structures as rates stay higher for longer,” Arougheti said.
Where LA invests
While alternative asset managers remain stringent with where they invest, Pitchbook data also revealed investors have ventured beyond the West Coast for opportunities.
The Great Lakes region, which includes business or industrial hubs such as Chicago, Detroit, Pittsburgh and Toronto, received the largest share of Los Angeles private equity deal value this year, accounting for 32% of local deal dollars tracked until October with $3.4 billion invested.
This trend is yet another sharp turnaround from how money flowed last year. The West Coast saw the highest dollar amounts per transaction last year, accounting for 61% of all Los Angeles private equity deal value while only amounting to 20% of the city’s transaction volume. The large valuations reflected a market bullish on local Aerospace, technology, and media companies that needed capital to expand market share.
For Shamrock Capital Advisors, a $4.5 billion private equity firm focused on media and entertainment, even as the tech and video streaming bubble deflated last year the firm’s locally rooted expertise of the sector inspired continued capital deployment. From its Fund V the firm invested in Los Angeles-based companies such as Entertainment Data Oracle Inc., The Religion of Sports Media Inc. and Boardwalk Pictures.
Despite slowed deployment this year, the firm closed its third equity fund with over $600 million in commitments this February — a round that was oversubscribed by $100 million. According to Michael LaSalle, a partner at Shamrock, the firm joins other players in the industry waiting for the right time to move.
“We’re developing (investment) themes years in advance,” LaSalle said. “So when an opportunity is ripe for us to make an investment, we have speed as an advantage.”
