Private Equity Industry Outlook 2023 - Slowdown in the Industry after 2 years of growth

On a wave of enthusiasm following the industry's record-breaking performance in 2021, private equity scored its second-best year ever in 2022. But throughout the year's second half, dramatic declines in deals, departures, and fund-raising were brought on by rising interest rates, which probably indicates a flip in trend.

The second half of 2022 saw a significant slowdown in private equity (PE) activity due to uncertainty and disruption brought on by inflation, rising interest rates, closed debt markets, and geopolitical unrest.

Notwithstanding ongoing inflation, the invasion of Ukraine, and escalating tensions with China, the industry maintained a record-breaking burst of deal activity from 2021 to the first half of 2022. Then, in June, when US central bankers announced the first of a series of three-quarter-point interest rate increases, their counterparts elsewhere did the same. Banks withdrew their funding for leveraged transactions. Deal making fell off a cliff, and exit and fund-raising totals fell along with it.

The first half of the year witnessed an environment of deals that carried over much momentum after PE firms announced transactions valued at US$515b. This was a tale of two markets. However, as the war in Ukraine's macroeconomic effects became apparent, the widening valuation gap and widespread dislocation in the financing markets also became evident. The limited access to PE's traditional sources of financing came to light in the second half of the year. PE firms began to exercise greater caution.

Current valuations will be under pressure due to weak economic growth, challenging political contexts, and constrained credit markets, which will also slow investment and realization activity.

Private markets responded more slowly, but public equities in 2022 immediately reflected these worries.

PE Growth Opportunities - 2023 to 2028

Between 2023 and 2028, the projection period, the global private equity market is predicted to grow significantly.

More generally, businesses will likely use additional inventive funding methods over the next months. Firms can continue operating using levers like seller financing, deferred equity, and over-equitizing transactions with an eye on future balance sheet reorganizations.

Opportunities have risen in the middle market, where deals are much simpler to put together, valuations are typically lower, and companies can write larger equity checks for transactions.

Increased activity in add-on deals was observed in 2022, and this trend is anticipated to last through the first half of 2023. For instance, add-ons have increased from an average of 48% of all PE activity during the past ten years to 60% of all PE activity in 2022.

Note: What is an Add on Deal?

Add on Deals are deals involving small companies with little to no infrastructure or a large company with a robust infrastructure – both with the goal of reaching more customers and geographies.

PE Firms and Public Markets – The Trend Continues in 2023

PE firms will also explore intriguing prospects in the public markets. In recent months, there has already been a flurry of such transactions globally as investors strive to benefit from depressed valuations. The public markets are seen as ripe with prospects to acquire compelling assets at competitive prices in 2021 due to strong IPO markets and increased SPAC activity. The latter continued in 2022, with private deals valued at more than US$262 billion.

Nevertheless, deal activity was lower and made up a much greater portion of the total capital spent.

Private Equity – Top Industries where PE funds are deployed

Between 2022 and 2028, the global private equity market is anticipated to expand at a CAGR of 10.2%. The primary factors influencing the growth of the private equity market are the available capital in the market and the expanding need for capital diversification. In addition, the number of private equity agreements is predicted to rise due to a renewed interest in startups.

For the first time, investment activity in 2021 exceeded the trillion-dollar threshold, making it a record year for the private equity sector. A total of 24,520 deals were completed, totaling $1.04 trillion in value, about twice as much as the previous year. Moreover, deal volume increased by 41.6% above 2020 during the same time, demonstrating that investors' projections of better deal-making in 2021 were accurate.

Top Industries – Private Equity

Information Technology (IT) remains the top industry of choice when examining the investment strategy from a sector viewpoint, with 63% of investors showing a preference to invest in IT. This is up from 51% in 2021, demonstrating that its appeal is increasing year over year. According to the respondents, Software & Services is by far the most chosen industry group within the sector across geographies, whereas just 17% plan to invest in Hardware.

Healthcare is now the second-largest industry after IT, increasing from 43% in 2021 to 47%. As the sector continues to present prospects, particularly in the Healthcare Technology sector, more investors are becoming interested.

Consumption (35%) and industrial (34%) sectors are contenders for the third sector of preference. Compared to last year (30% and 26%, respectively), both industries are more appealing. However, out of all the industries, the Consumer sector witnessed the biggest increase in deal value in 2021, doubling from $63.3 billion to $180.8 billion. As a result, PE/VC businesses looking to invest in the consumer sector intend to concentrate on the sub-sectors of Consumer Retail (24%) and Consumer Producers (18%) while being circumspect about Consumer Leisure (8%).

Many PE firms are catching up and integrating cutting-edge data and analytics technologies to uncover new growth prospects and maintain their competitiveness, even though they need to be more active in adopting the digital technology revolution.

Top Private Equity Firms

Private equity firms are the investors in charge of raising capital or funds for equity contributions using a variety of tactics from leveraged buyouts, growth capital, venture capita and more. Some of the top Private Equity Firms globally are:

Blackstone Group LP
Apollo Global Management LLC
KKR & Company LP
Ares Management LP
Carlyle Group
Oaktree Capital Management LP
Fortress Investment Group LLC
Bain Capital LLC
TPG Capital LP
Ardian

Trends in the Post-MBA Market (2022-23)

Business Schools with the highest percentage of MBA graduates placed at PE firms are Stanford, with 14%, and Harvard, with 15%. Harvard and Stanford can be clearly stated as the center for PE recruitment. Although Harvard observed a positive growth of 1% in recruitment of MBA grads in PE firms, Stanford saw a one percent drop.

Other schools with a positive percentage of PE placements are Wharton (9.7%), LBS (7%), and Booth (7%).

Despite having low placements in PE firms, business schools such as MIT Sloan and Columbia have either maintained the hired percentage or slightly increased the hiring.

UCLA, Yale, Duke Fuqua, and NYU Stern have observed a slight decrease in PE firms' recruitment of MBA grads.

Business Schools	MBA Private Equity Recruitment (2022-23)	MBA Private Equity Recruitment (2021-22)
MIT Sloan	4.2%	3.6%
Stanford	14%	15%
Columbia	4.7%	4.1%
Chicago Booth	7.1%	6.8%
Harvard	15%	14%
NYU Stern	0.9%	2.4%
Wharton	9.7%	8.6%
Kellogg	4.33%	NA
Duke Fuqua*	6%	9%
LBS	7%	NA
INSEAD	5%	NA
Tuck*	2%	3%
Yale	1.9%	3.3%
Ross*	2.3%	NA
UCLA Anderson	1.9%	2.5%