2024 Private Equity Fundamentals
A valuation reckoning looms as portfolio company performance deteriorates
Private equity firms have accumulated a record inventory of portfolio companies as exits and distributions remain on ice.
What type of companies are in these portfolios, and what about them makes them hard to sell?
We developed a methodology that provides a glimpse into a sample of PE-backed companies that we looked at in 2023 and 2024 and can now revisit to better understand the market. Our dataset is North American sponsor-backed companies that have either a) IPOed since 2020 and are still >30% sponsor owned or b) LBOed since 2015 and issue public debt. These companies skew larger than the typical buyout, and we only have about 184 companies in the sample, but this sample should provide some insights into the broader market.
PE-owned companies are strikingly different from the public companies we’re used to.
Sponsor-backed companies are tiny. The median S&P 500 constituent has about $13B of revenue, 20x the size of the median company in our dataset at ~$620M of revenue.
PE portfolio companies are significantly more leveraged, with the median spending about 4% of revenue on interest payments versus 1% for the S&P 500.
Borrowing costs are significantly higher—over 8% at the median—relative to the S&P 500 constituents borrowing at the median at <4%.
PE portfolio companies have lower median EBITDA margins (7% versus 25% for the S&P 500) and lower FCF margins (2% versus 9%).
Figure 1: PE vs. S&P 500 Median Fundamentals
Source: Capital IQ, Verdad
Overall, PE portfolio companies are smaller, more leveraged, pay higher interest rates, and have lower margins than public companies.
These are not great selling points for private equity as an asset class. Buying sub-scale, low-margin businesses with expensive debt hardly seems like a path to riches. So it’s not hard to see why public companies have limited interest in making “strategic acquisitions” and why PE investors aren’t so jazzed about these companies going public.
We can also look at how these companies have performed in terms of growth. The median company in our sample grew revenue at 4% and EBITDA at 3%, while the median S&P 500 company grew revenue at 5% and EBITDA at 7%. These differences are not statistically significant, but if you’re investing in PE because you believe that the asset class as a whole is selecting better companies or running companies better, it’s quite hard to see how that’s true from this dataset.
The core problem remains leverage. The typical PE-backed firm has interest costs that far exceed those of their public peers, and with floating rates pinned near 10%, these are real, cash-draining expenses. Many of these loans come with PIK (payment-in-kind) toggles that delay the pain but don't remove it.
Private equity remains popular among allocators, but the fundamentals tell a sobering story. Portfolio companies are smaller, less profitable, slower growing, and more leveraged than their public peers. And that’s before considering that public comparables have far more flexibility in capital markets.
The bull case for PE used to hinge on financial engineering and multiple expansion. Today, with debt expensive and exit multiples compressing, the tools that fueled outperformance are turning into liabilities. As always, we return to the data—and the data continues to suggest that the private equity model is under increasing strain.