Private Equity Markets Outlook: Resilience, Challenges, and Emerging Opportunities

While public equity markets faced significant declines in 2022 due to rising interest rates, elevated inflation, and growing uncertainty, private equity markets experienced a milder drawdown. Companies backed by private equity firms managed to generate earnings, allowing them to “grow” into existing valuations, in contrast to the declining earnings observed in public markets. As public equities show positive returns year-to-date, investors are now pondering what implications this might hold for the future of private equity.

The Resilience of Private Markets

Despite facing similar challenges, private markets have demonstrated greater resilience compared to their public counterparts. However, they have not emerged unscathed. Fundraising activity has slowed compared to previous years, and the cost of leverage has increased, leading to a deceleration in deal activity and exit transactions. This backdrop suggests the possibility of a more notable re-rating in valuations later in 2023 or early 2024, presenting opportunities for both primary and secondary market investors.

Funding Challenges and Dry Powder

Concerns arise over the lackluster fundraising environment and its potential impact on the ability of private equity investors to seize emerging opportunities. However, it’s worth noting that private equity investors still hold a substantial amount of dry powder, nearly USD 1 trillion, indicating their capacity to capitalize on valuation adjustments. While a higher cost of capital may lead to differentiation between successful and unsuccessful companies and managers, history has shown that some of the best returns have been achieved by funds raised during challenging economic and capital market conditions.

Expanding Private Investment Universe

Another concern expressed by investors revolves around a shrinking private investment universe, suggesting that private equity investors might be running out of new opportunities. Contrary to this, there has been a notable increase in applications for new business formation in the United States since the pandemic began, particularly in the services and technology sectors. These emerging businesses will require funding in the coming years. Moreover, as companies opt to stay private for longer periods and attain higher valuations upon going public, private markets are poised to play a crucial role in their growth and development over the long term.

Conclusion

The landscape of private equity markets in 2022 faced its share of challenges, but it demonstrated resilience in comparison to public equity markets. Although fundraising activity slowed and deal dynamics shifted, private equity investors hold considerable dry powder to capitalize on potential valuation adjustments. The evolving private investment universe presents new opportunities, with emerging businesses in various sectors seeking funding. As private equity navigates the complexities and uncertainties ahead, strategic investors can find potential in a market shaped by resilience, adaptability, and the pursuit of promising growth prospects.