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Back in May I wrote about the private equity industry and how deal activity in the first quarter of the year was pretty solid, despite the headwinds that buyout firms faced in the shape of higher interest rates, higher inflation, and the general uncertainty around the economic climate.
There’s always a reporting lag in the private markets, so full year data for 2023 won’t be available until the first quarter of next year. But EY published its most recent private equity pulse at the end of October, showing the number of deals on the increase and a steady aggregated value of deals.
Exits were unsurprisingly weaker, of course. Pitchbook says that Q3 delivered the weakest quarter for US PE exits since the Global Financial Crisis. That’s no surprise given that there’s a mismatch at the moment between what sellers want to sell for and what buyers want to pay (don’t take my word for it – watch this Bloomberg video with The Carlyle Group’s David Rubenstein instead).
One thing that I found interesting in EY’s report was the mention of a broader array of deal types. Carve-outs counted for a good percentage of the top 20 deals in the third quarter, for example, compared to only 5% in Q1.
But what was most interesting is that EY surveyed private equity investors recently and two-thirds expect acquisition activity to accelerate in the next six months. That’s encouraging for the industry generally, and there would seem to be plenty of room for growth. EY’s report shows that from Q1 2021 through Q2 2022, more than $250bn of deals were completed each quarter, save Q1 2022 when the volume was ‘only’ $246.4bn. Since Q3 2022, that number has more than halved, which is, of course, a significant pull back. And, while fundraising is down when compared to the past couple of years, more than $200bn was raised in the first half of 2023, which, when added to the existing dry powder in the industry, represents a vast amount of money that needs to find a home.
As I mention above, it will be a few months until we see the full year picture for 2023. But what I’m no longer surprised about is private equity’s resiliency. Yes, this year has been something of a pull back in the industry but it’s important to judge it in terms of historical levels, not only the past couple of years. By many measures, 2023 has been a ‘normal’ year in private equity circles.
Whether the heady heights of 2021 and 2022 are reached again in 2024 remains to be seen. It’s likely that interest rates and inflation both need to fall for that to happen, and some say that the Fed won’t cut rates ahead of a Presidential election, as they don’t want to be seen to be taking sides. Whether that’s true or not, I don’t know. But it does add to the short-term macroeconomic uncertainty in the market, which still impacts the buyout space.
What is very likely, however, is that the private equity space will continue to show signs of some kind of uptick in acquisitions, exits and fundraising, which is not something that could have been said with a hand on heart just a few months ago.