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Just before Christmas, Pitchbook published Looking ahead at PE landscape with quantitative data from 2022, an article which covers the outlook for the private equity industry in 2023. Click the link to read the piece, but to sum up, the article discusses the possibility of a U.S. recession, dealmaking activity in the first three quarters of last year, liquidity risk, and buyout deal volume.
Pitchbook’s data shows that the number of deals picked up in the third quarter, after falling in the first half of the year. The PE industry has long touted not only its resilience but its ability to find deals at decent prices in all market environments, and I would assume some of the uptick in Q3 is due to some enterprising firms finding comparative bargains during the quarter.
Still, Pitchbook forecasts PE deal activity to slow this year, by about 10%. But exits are forecast to increase this year; if you strip out Q2 and Q3 of 2020, when the initial impact of Covid-19 was most keenly felt, the second quarter of 2022 delivered the lowest number of exits since Q1 2017.
What will be interesting this year is to see what will drive this increased exit activity. Higher interest rates will mean higher interest payments for portfolio companies – that might make some PE firms forced sellers in the sense that any portfolio companies that are struggling might be cut loose. And the spectre of a recession in the United States – Pitchbook forecasts the probability of this occurring at 65% – might mean that PE firms look to get ahead of any challenging scenarios.
A lot will depend on the stage each fund is at. Funds at the beginning of their life, which have made some initial investments even before the final close, will be better placed to ride out a shorter-term higher interest rate environment (the Fed itself forecasts rates to start coming down in 2024) and / or a recession in the U.S. Those towards the end of their life might end up taking a haircut on the sale price as buyers’ price in macroeconomic risk into their deals. Or we might see even more GP-led secondaries – if a buyout firm thinks that they have a good asset that they do not want to sell due to a short-term dislocation, they might tap up the secondary market to provide their LPs with liquidity and themselves with a longer runway to support the portfolio company.
We have already seen that PE fundraising was down in 2022 when compared to 2021, valuations adjust in line with lower public equity markets and LP appetite for private equity funds begin to wane (the Rede Liquidity Index dropped to its lowest score on record), so this year looks set to be one of the more interesting in recent times as the private equity industry looks to navigate these challenges.
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Anthony D. Mascia is Managing Partner at EFSI. Connect with him on LinkedIn here.
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