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.
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.