Private Equity Firms Expect Middle-Market Dominance in 2023 as Monetary Tightening Drives Deal Volumes and Values Down, Yet Fundraising Still Outstrips Pre-Pandemic Levels

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Nov 28, 2022, 10:18 ET

Increasing interest rates and cost of leverage amid monetary tightening is the top challenge facing the US PE market, according to Dechert's "Global Private Equity Outlook Report"— but dealmakers continue to find creative solutions for growth

Highlights

Global PE deal activity experienced a significant slowdown in the first three quarters of 2022, with the number of deals falling 18% and value nearly halving from US$1.2 trillion to US$685 billion compared to the same period in 2021. However, the market share of private equity transactions as a proportion of global M&A activity has continued to steadily grow, reaching a record 23% as of Q3 2022, according to Refinitiv.

PE fundraising dropped 16% by value and 30.6% in the number of funds closed through Q3 2022, compared with the same period in last year.
2021 was an outlier for PE dealmaking, but 2022 has already seen 2,081 buyouts in the US worth US$333.4bn in the first three quarters of the year— above the total value and volume of any full-year period in the decade before 2021.
37% of respondents believe retail access to PE vehicles will expand as an after effect of the COVID-19 crisis.
50% of respondents are now very likely to consider GP-led secondary transactions, a trend that 65% of respondents also see growing as an offshoot of the pandemic.
63% of PE firms are planning to make a GP-stake divestiture in the next 24 months.
Take privates were the least favored deal choice among respondents, with over half either not very likely to consider a public-to-private option (26%), or reservedly saying it depends on the specific deal (26%). This in large part stems from the difficulty of financing these transactions despite the attractive valuations of many public companies.
51% of the respondents have increased their use of private credit to finance buyouts in the last three years.
Divergence in market sentiment over liquidity in the next 12 months was shown. 82% of those from North America and 80% of respondents from EMEA have a favorable view, with only 45% of APAC respondents sharing a similar outlook.

NEW YORK, Nov. 28, 2022 /PRNewswire/ -- Rising leverage costs and volatile valuations driven by economic downturns and increasingly tight monetary policy are the greatest challenges facing the private equity industry, according to the 2023 Dechert Global Private Equity Outlook report.

The US, like other regions in 2022, saw the PE buyout market shift down a gear, with the number of transactions in the region declining by 15% and their aggregate value sinking 43% in the first nine months of the year, compared to the same period in 2021. In the US, the number of buyouts across this period totaled 2,081 with a value of US$333.4bn. Among PE leaders, this trajectory is expected to continue into 2023 and beyond, driven by tightening credit conditions and broader economic dislocation. On the bright side, the market share of buyouts as a proportion of overall M&A activity continues to grow with the percentage share approaching 25% in the Americas through Q3 2022, according to data from Refinitiv.

More than 40% of US respondents said valuation and economic uncertainties were among the top two challenges the PE industry faced. The data, published today, in association with Mergermarket, surveyed more than 100 senior-level executives within PE firms based in North America, EMEA, and Asia-Pacific (APAC). This is Dechert's 5^th annual Global Private Equity report.

Despite this, the global volume of transactions remained surprisingly robust. General Partners (GP) remained highly active on all but the largest transactions: "There is always something going on in the middle market, whether it is new platform deals or add-on acquisitions. Even though the amount of capital being invested has fallen, private equity has really demonstrated its resilience," said Dr. Markus P. Bolsinger, co-head of Dechert's global private equity practice and partner in the firm's New York and Munich offices.

The current environment does provide opportunities, being particularly highly favorable to those sitting on dry powder, having access to private credit financings and taking a prudent approach. As bid levels are reined in, new transactions are being more honestly priced in comparison to the last decade where cheap debt and a superabundance of equity capital have made for frothy valuations.

About Dechert's Global Private Equity Practice

Dechert is a leading global law firm with 22 offices around the world. Our global team advises private equity, private credit and other alternative asset managers on flexible solutions at every phase of the investment life cycle. We form funds structured for market terms and tax efficiency; negotiate investments and advise on transactions and financings that maximize value; and structure and execute exits accomplished at the right time and delivering the best returns.

Methodology: Mergermarket, on behalf of Dechert LLP, surveyed 100 senior-level executives within private equity (PE) firms based in North America (45%), EMEA (35%), and Asia-Pacific (20%). In order to qualify for inclusion, the firms all needed to have US$1bn or more in assets under management. The survey included a combination of qualitative and quantitative questions.

SOURCE Dechert LLP