5 minute read 24 Jan. 2023
Closeup shot of a doctor taking a patients pulse

Private Equity Pulse: Five takeaways from 4Q 2022

By Pete Witte

EY Global Private Equity Lead Analyst

Helping clients and stakeholders understand the trajectory and impact of vital trends. Developing thought leadership and insightful content. Aspiring platform tennis pro.

5 minute read 24 Jan. 2023
Related topics Private equity IPO

PE firms stay active despite a more challenging macro environment.

In brief
  • 2022 was the second-most active year of the last decade, with PE firm transactions valued at just under US$730b.
  • PE firms remained active due to the abundance of private credit.
  • Fundraising remained resilient in 2022 due to the result of strong distribution activity over the preceding 18 months.  

2022 was an incredibly dynamic year for the PE industry, characterized by continued growth, innovation, creativity and the trademark resiliency that has defined the industry since its inception. It was a tale of two markets, wherein the first half of the year saw a deal environment that carried over much of the momentum from 2021’s record levels of activity: PE firms announced transactions valued at US$515b. The second half of the year, however, saw PE firms become increasingly cautious in the face of rising inflationary pressures, the macro impacts of the war in Ukraine, a widening valuations gap, and perhaps most importantly, widespread dislocation in the financing markets that restricted access to PE’s traditional sources of financing.

  • Image description

    The above bar chart shows activity significantly declining in the second half of the year, from 166 deals valued at  US$267b in Q2 to 98 deals valued at US$99b in Q4, as macro impediments impacted deal activity.

As with everything, however, context matters. Despite the drop-off in announced deals over the course of the year, deal values closed 2022 well above pre-pandemic averages. Indeed, it was the second-most active year of the last decade, with PE firms announcing transactions valued at just under US$730b. 

  • Image description

    The above bar chart shows how despite the second-half decline, 2022 remained the second-most active year of the last decade, with 540 deals valued at nearly US$730b.

Private credit’s inroads will be 2022’s legacy

One reason PE firms have been able to remain active is the abundance of private credit. The market share gains made by direct lenders is likely to be the most enduring legacy of today’s volatile climate. PE’s traditional financing markets experienced a marked slowdown in 2022, as banks accumulated leveraged buyout (LBO) exposure they later had difficulty offloading, limiting appetite for new deals. In total, according to the Bloomberg article “Banks stuck with US$42b in debt seize chance to offload,” released on 29 November 2022, there is currently in excess of US$40b of hung financings (both PE and non-PE) on banks’ balance sheets.

As a result, the market has pivoted dramatically toward direct lenders. Last year, private debt comprised approximately one-third of the overall financing market for PE deals. In the first half of 2022, private lenders made up more than half of the overall lending market; in the second half, they comprised the vast majority of financing for PE transactions. And while the syndicated markets will eventually stabilize, the speed, flexibility and certainty of close provided by private lenders is likely to find them a more permanent place in investors’ toolkits.

More broadly, the next several months are likely to see other forms of creative financing employed by firms as well. Seller financing, deferred equity and over-equitizing transactions with an eye toward reconfiguring the balance sheet at a later date are all levers that will allow firms to remain active.

Firms to capitalize on opportunities in take privates and carve-outs

Opportunities will come in a number of spaces  the aforementioned financing challenges, for example, have clearly precipitated a shift toward middle-market deals, where packages are far easier to pull together, valuations tend to be lower and firms are able to write higher equity checks for transactions.

Add-on deals saw higher levels of activity in 2022, a trend expected to continue into the first half of 2023. Over the last decade, for example, add-ons have averaged 48% of total PE activity; in 2022, they grew to 60% of the total PE market.

Add-on deals


of PE deals were add-ons in 2012–2021.

Add-on deals


of PE deals were add-ons in 2022.

PE firms will also seek out interesting opportunities in the public markets; already, recent months have seen a flurry of such deals across the globe as investors look to take advantage of reduced valuations. With strong IPO markets and increased SPAC activity in 2021, public markets are seen as rife with opportunities to acquire compelling assets at attractive prices. In aggregate, PE firms announced take — private deals valued at more than US$262b in 2022, roughly on par with the prior year — but because deal activity was lower, they comprised a significantly larger percentage of the overall capital invested.  

In a typical year, take-privates represent


of PE deal value.

Last year, take-privates represented


of PE deal value.

Carve-outs are another area where firms will seek opportunities. Uncertain macro conditions lend themselves to such transactions as corporates focus on core lines of business and divest noncore or orphan assets. For PE firms, these deals can be significant competitive differentiators, especially for larger funds that can leverage their scale and operational expertise to drive value. 

Sector outlook

PE investment in the technology sector has been a powerful theme for much of the last decade, and 2022’s macro headwinds did relatively little to diminish that. Indeed, despite reduced near-term growth expectations in many spaces, it remains a strong long-term secular trend that investors are continuing to support. In many instances, valuations have ticked markedly lower, and firms have been able to acquire interesting companies in the SaaS and cyber spaces at attractive prices. In aggregate, tech accounted for more than US$180b in PE deployment last year, representing 26% of the industry’s total deal value.

While energy is a sector that has been out of favor for a number of years, recent geopolitical events, combined with a long-term secular trend toward greater reliance on renewables, have made the sector more attractive. PE firms invested nearly US$53b into energy and energy-related spaces last year, and momentum should carry over into much of 2023.

Infrastructure is another space where PE firms will see significant opportunities in 2023; in particular, firms will be looking for creative collaborations with corporates that provide long-term funding for capital-intensive projects. 2022 saw a small handful of these bellwether deals – Brookstone’s partnership with Intel to build new semiconductor capacity being perhaps the most significant. For PE shops, these transactions represent an opportunity to provide low-risk financing at interesting rates of return without the need for expensive operational interventions. For corporates, they represent an opportunity to lower their cost of capital while retaining cash and debt capacity for further investments. The semiconductor, telecom, transportation, renewables, digital infrastructure, and mobility spaces are a few verticals where these types of transactions could occur with increased frequency.

A dearth of exits is leading to a bifurcated fundraising environment

Fundraising remained relatively resilient in 2022, the result of strong distribution activity over the preceding 18 months. Overall, PE fundraising fell 16% in 2022, to US$500b.

As 2023 progresses, it’s likely that a slowdown in exits will impact LPs’ ability and willingness to make new commitments, especially with their noncore managers. According to Pitchbook Quantitative Perspectives / US Market Insights, Q3 2022, roughly 80% of PE’s capital comes from reinvested distributions — and the second half of last year was the slowest for exits since the pandemic. 

  • Image description

    The above bar chart shows PE fundraising falling 17% in 2022, from US$593b to US$491b.

It’s unlikely that these challenges will be distributed equally — indeed, for many of the largest funds, asset gathering continues in earnest. Blackstone, for example, reported in Q2 that it had closed one of its best fundraising quarters ever, and as of Q3 had brought in more than US$180b over the prior twelve 12 months. 

PE capital raised


of total PE capital raised by the largest funds (US$5b+) in 2021.

PE capital raised


of total PE capital raised by the largest funds (US$5b+) in 2022.

According to Pitchbook figures, more than 500 funds held a final close in 2022, but the top 20 raised roughly half of the industry’s total capital. There’s a confluence of factors —driving this — institutional LPs are consolidating their funding with their best and their largest relationships, something commonly seen in times of elevated uncertainty. But perhaps more importantly, the largest funds have made significant investments in diversifying their platforms, offering products targeted at a broader range of investors, primarily in the retail space, but also with insurance assets, giving them a strong base of permanent capital and otherwise sticky capital.

Capabilities for operational value-add will be the primary differentiator for PE firms in 2023

While the next several months could continue to challenge dealmakers with macro headwinds, it’s also poised to be a period where firms can engage with interesting opportunities, and most importantly, can flex the operational muscles built over the last decade.

Maintaining margins will be a top priority; top-line initiatives will focus on helping portcos lean into new growth opportunities will remain essential, and cost levers will take on elevated levels of importance. Firms will also focus on the overarching enablers of value creation including digital transformation, talent management, and ESG, where they’ll shift from a risk- management paradigm to a robust value driver. These levers, all increasingly critical, will help firms differentiate themselves in the coming year and beyond. 


The quarterly PE Pulse provides data and insights on private equity market activity and trends. 

About this article

By Pete Witte

EY Global Private Equity Lead Analyst

Helping clients and stakeholders understand the trajectory and impact of vital trends. Developing thought leadership and insightful content. Aspiring platform tennis pro.

Related topics Private equity IPO