Private Equity’s Robustness Being Put To The Test

The current drawdown in public equities – the longest for many years – is its own advertisement for an allocation to alternative investments. Accessing return streams that can provide alpha when public equities sell off or soften the blow – or both – continues to gain interest from investors, with a report from Preqin at the beginning of 2022 saying that it expects AUM to almost double by 2026, from $13.32trn to $23.21trn.

Private equity has become one of the, if not the, largest sub-sector within alternatives; it’s something of a capital raising juggernaut, seeming to set record highs almost every year. But the PE market, just like every other market, has been affected this year.

In terms of fundraising, Q1 and Q2 delivered the lowest number of fund closings and aggregate capital raised in the past five years, likely driven by macroeconomic and geopolitical uncertainty. There’s been a change in the time that funds have been in the market, too; before the Covid-19 pandemic, almost 40% of funds hit the market then closed within 6 months – less than 20% of funds enjoyed the same success in the first half of this year.

It’s a bit of a different story in the investment side of the market. Aggregate deal value, whilst falling, isn’t being affected to the same extent as capital raising – yet. Preqin’s report from July this year shows that Q1 and Q2 still delivered two of the highest quarters for the number of buyout deals in the past five years. Record amounts of dry powder in the industry may well have something to do with that, and it should be noted that the trend is a downwards one.

In the exits side, buyout firms are holding onto their portcos for longer. Q1 this year saw the total number of exits being fairly consistent with the average of the past five years, but a sharp drop in Q2 shows the challenges that PE firms face in getting what they think is an acceptable price for the companies they own.

Private equity has always prided itself on its robustness – certainly in the buyout sector, the fact that PE firms have control means they can steer their portcos in a different direction and the private nature of these firms means that they tend to be more nimble than their public counterparts. But valuations of private companies are clearly more difficult to measure at the moment, given the volatility in public markets, and so it will be interesting to see whether the downward trend in deal activity and exits continues through the rest of the year or whether Q2 was something of a bottoming out for the market.

Anthony D. Mascia is Managing Partner at EFSI. Connect with him on LinkedIn here.

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