By Joel Kranc
Looking at the headlines for private equity (PE) in 2022, there are clear signs of a slowdown. The number of deals fell18% and the value nearly halved from $1.2 trillion to $685 billion compared to the same period in 2021, according to research firm Refinitiv. Also, 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.
Much of this is due to rising leverage costs and volatile valuations driven by economic downturns and a tight monetary policy. “We spend a lot of time wasting time.” We have been as busy as we have ever been in 2022 but there is an inability to do transactions in private equity,” said Saar Pikar, Managing Director for OMERS Growth Equity on the State of the Union: Private Equity Power Panel at the CAIP Private Equity Summit in Toronto.
In other words a lot of deals are being seen but not a lot of execution is happening. He adds that it’s difficult to do private equity deals these days mainly because of the difference between public and private company valuations. “You can’t reach conclusions on valuations because founders and owners are thinking they’re companies are worth more, not recognizing the market lag that is occurring. We have to parse out every transaction and decide what is the real valuation so we can have equivalency in the private market,” he explained.
Jennifer Pereira, managing director, Direct Private Equity, CPP Investments, agrees and noted: “We’re spending our time being patient and planting a lot of seeds. There is dissolution between fundamental value and real value. It’s a great time to rebuild discussions. We think it will be busy in 2023. PE funds were active in 2021, but we were disciplined over the past year but don’t have a pressure to overpay for assets. Can go after assets as dissolution occurs.” It’s about getting great assets and not timing the market for the bottom.
Many on the panel agree that there is a disconnect between public and private markets that are affecting deal flow. “Deals are taking longer. Historically PE were fighting for deals and now there is more patience, and it’s comforting to see everyone else is going through what we’re going through,” noted Gregg Delcourt, Chief Investment Officer, Alaris Equity Partners.
The U.S., 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 totalled 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.
From an investor point of view it’s easier to be patient to make wise choices. “Many pension funds public equity assets are down and as a result they are not as able to put money into private equity,” noted Anastasia Ella. Senior Principal, Private Equity, IMCO. There are many companies looking for capital and so we can pick and choose our spots. On the direct investment side, we are seeing a pause because of leverage markets and disparities between…healthcare and other services. As a result, we are not timing the market.”
Overall, as Pikar noted, fundamentals no longer matter. “But rather the perceptions of other people as it relates to valuations of companies,” matters. A recession may in fact be a positive for investors because pricing will be better. But added Pereira, valuations will decrease.
For now, it appears 2023 will shape up to be a banner year for PE. Refinitiv says 2022 has already seen buyouts worth $333.4 billion and growing. By all indications, being patient will pay off to large institutional investors with dry powder still on their books.
