Private Equity Pulse: takeaways from 1Q 2023

Take-private deals take center stage amid continued macro volatility.

For many reasons, PE is better suited today to manage volatility than it has ever been before. Firms have more capital at their disposal — more than US$1.2t in dry powder — and moreover, have diversified in ways that increase their resilience and flexibility, such as adding new asset classes. Most importantly, the sector as a whole has expanded its operating toolkit by building deep sector and functional expertise.

Macro headwinds continue to be top of mind for PE and make the operating and deployment environment challenging for PE firms, with instability in the banking system providing an additional headwind, insofar as it pulls immediate concerns around risk management to the forefront while pulling focus from longer-term value creation opportunities and opportunistic investments.

Firms are focused on a number of interesting spaces at the moment as they seek to:

1. Work within the constraints of a more limited financing environment
2. Deploy capital into companies with compelling long-term growth stories, which in many cases may be temporarily oversold or otherwise mispriced.

A barbell-shaped market dominated by take-private activity

Over the last several quarters, the market has bifurcated, with one side defined by smaller transactions, and the other by take-private deals that have dominated deal activity for transactions of significant size.

The first quarter of 2023 saw PE firms announce deals valued at US$92b, a marked decline from the US$240b announced in the first quarter of last year, but roughly on par with Q4. Activity picked up as the quarter progressed, however, driven by large-scale take privates – March saw more than US$62b in PE deals announced, versus just US$12b in January.

Because public market valuations adjust (both higher and lower) more quickly than in the private markets, PE firms continue to seek to take advantage of reduced valuations. In a typical year, take-private deals might represent 20% of total PE activity by value. Last year, as stock prices fell, roughly 40% of PE activity was in this category. Thus far in 2023, more than 80% of PE activity by value was deployed in take-private transactions — by far a record, and underscoring the degree to which firms are trying to stay disciplined and looking for opportunities to invest in high-quality assets that they believe are temporarily mispriced.  

Tech remains a powerful theme despite a broader sector slowdown

Tech remains a powerful thesis, the result of continued belief in the sector’s long-term secular growth trends coupled with the ability to acquire assets at moderated valuations. The space has garnered nearly a quarter of aggregate PE capital invested in significant transactions (US$100m-plus) over the past five years. The first quarter of this year was no exception — tech-focused deals accounted for 50% of PE’s total activity by value, up from roughly a quarter in the first three months of 2022. 

In particular, firms are finding opportunities in software, especially those engaged in developing enterprise platforms deployable for enhancing cybersecurity, artificial intelligence and machine learning (AI/ML), climate-tech, and supply chain analytics. In total, 80% of PE’s deployment so far this year in the tech space has been in the software vertical. We expect such deals to build further momentum and expand into the areas which are a confluence of tech and other core sectors, such as FinTech and Consumer-Tech.

Exit activity remains muted

Exit activity remains muted, the result of limited appetite from corporate acquirers, an IPO window that remains largely closed, and continued general caution among potential PE buyers. PE firms announced exits valued at US$54.5b in the first quarter of the year, down 77% from the same period a year ago, and down 53% from Q4 of last year. 

Declines in the IPO route remain particularly acute amid a broader slowdown in the IPO markets - just four PE-backed deals have priced thus far this year, down from nearly 300 for the full year 2021. Nonetheless, firms remain ready for when the window reopens. Currently, there are 29 PE-backed deals in active registration across a range of industries, including technology, industrials and consumer products.