5 minute read 14 Nov 2022
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Private Equity Pulse: Five takeaways from 3Q 2022

5 minute read 14 Nov 2022
Related topics Private equity IPO

The PE sector continued to experience headwinds in the third quarter. However, firms are positioning for long-term strategic growth. 

In brief
  • Firms opportunistically seek high-quality assets as deal sentiment softens.
  • PE fundraising activity in 3Q22 slowed by 13% to US$125b versus Q2.
  • Amid depressed valuations and expectation of prices between acquirers and sellers, PE exits fell 67% in the third quarter versus last year. 

The PE sector continued to experience a number of cyclical headwinds in the third quarter, as rising interest rates, growing concerns of a recession, deteriorating macro sentiment and challenges in the financing markets all conspired to limit firms’ ability to execute new transactions. At the same time, however, firms continue to position themselves for long-term strategic growth, with new product launches and innovations, and by tapping new sources of capital that will allow the industry to continue to grow.

Deal sentiment softens amid hesitation in the financing markets; firms continue to opportunistically seek high-quality assets

After record-setting levels of deal activity last year and into early 2022, deal volumes began to moderate toward the end of the first half of the year, as the macro-outlook became more uncertain, valuation gaps emerged. And a measure of dislocation in the financing markets limited the amount of capital that firms could effectively put to work. Activity in the first half of this year declined by 18% versus 2021, a fairly modest drop considering that last year was by far the busiest year on record for PE firms. In the third quarter, however, activity declined 55% relative to Q2.  

One major reason for the decline has been turbulence in the leveraged financing markets, which are effectively limiting the size of deals that PE firms are able to execute. After a record year last year, which saw almost US$1t in new leveraged loan issuance, 2022 has seen a significant drop-off, with just US$350b in leveraged financing activity, as banks grappled with unsold inventory from LBOs announced early in the year, which limited their appetite for new transactions. As a result, the locus of activity has shifted downmarket, where valuations have moderated and financing is more readily available, especially from private credit providers, who have been very active in filling some of the gaps left by the syndicated market. Just 22% of PE activity so far this year has been in deals at US$1b and up, down from 30% last year. 

From a sector perspective, some areas, such as consumers, real estate and technology, could attract a greater proportion of PE capital in the last 12 months versus the preceding comparable period, amidst several adversities, at the back of the strong resilience that the incumbents in these industries demonstrated during the pandemic as well as in the times of volatile market conditions historically.

Fundraising: A tale of two markets

PE fundraising activity has remained largely flat through most of 2022, albeit down from last year’s active environment. Firms have raised US$386b so far this year, 8% lower than the same period last year. Notably, activity in 3Q22 slowed by 13% to US$125b versus Q2.

Perhaps the most interesting dynamic in the fundraising market is the degree to which firms of different sizes are affected disproportionately. Indeed – there’s a measure disconnect between what some of the largest firms in the market are experiencing and what’s happening in the market overall. Indeed, when many of the large public managers reported Q2 earnings, they saw AUMs increase despite a market environment where many were taking writedowns on their portfolios – the inflows they were seeing were sufficient to outpace the mark-to-market declines. Blackstone, for example, has seen approximately US$350b of inflows over the last 12 months, and reported that the second quarter of 2022 was one of their best ever.

At some point however, if the market experiences a protracted period where exit activity remains highly limited, it’s likely that fundraising challenges will evidence at even the largest firms. However, with about 20% of the industry’s capital coming from new investors — mostly HNW, which tends to favor larger managers that have invested in those channels — some measure of that pressure is likely to be ameliorated.

PE exit activity remains muted amid IPO market shutdown and buyer/seller price gap

PE exits fell 67% in the third quarter versus last year amid depressed valuations and the widening gap in the expectation of prices between acquirers and sellers. Indeed, the focus for many PE firms has shifted from divestment toward value protection, with firms that are confident in the quality of their assets mostly waiting for a more conducive exit environment. This is particularly the case in the IPO market, where activity has effectively ceased this year. Two key outcomes of slower exit activity include: 

  • Increased activity and fundraising in the large-sized secondaries and continuation space. Pitchbook data suggests that secondaries funds raised close to US$8b in 3Q22, significantly higher than US$3b raised a year earlier.
  • Limited distribution activity will lead to a more constrained fundraising environment as the velocity of recycled capital slows. 

Despite headwinds, firms continue to position themselves for long-term strategic growth

  • LP confidence toward the asset class remains intact: Pitchbook data shows that US buyout funds vintaged 2002-2016 have returned 15% net IRRs to investors; a solid track record of generating alpha in the market and the potential to navigate uncertainties have kept LP confidence intact. As the immediate volatility caused by the macro shift begins to recede, it’s possible, and perhaps even likely, that LPs pivot to even higher allocation to PEs in pursuit of increased returns despite recent mark-to-market price erosions.
  • PE firms continue to experiment with newer products leveraging technology: The third quarter saw a number of announcements that furthered PE’s inroads into the retail market. Apollo, for example, introduced a vehicle designed for retail investors that’s intended to be considered a core equity substitute. And KKR recently announced the first tokenized fund from a major PE house to be listed in the US, partnering with digital asset securities firm Securitize to offer its Health Care Strategic Growth Fund II on the Avalanche blockchain.
  • Organic value creation to drive PE returns: As we enter an environment where leverage continues to get increasingly expensive and firms will be required to increase their equity contributions; where for the current cohort of portfolio companies, multiples are likely to contract, in a major reversal from the last several years; it’s operational value creation that will drive the bulk of PE returns.
  • As interest rates continue to increase and the cost of financing rises, firms will pursue creative ways to deploy capital: In August for example, Intel and Brookfield Infrastructure Partners announced a joint US$30b partnership to expand Intel’s manufacturing capacity. For investors, these transactions represent an opportunity to provide low-risk financing at compelling rates of return without the need for significant operational interventions; for their corporate partners, they represent an opportunity to lower their cost of capital while retaining cash and debt capacity for further investments. Semiconductors, telecom, transportation, renewables, and mobility are just a few of the spaces where firms could increasingly seek out such collaborations.


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

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Related topics Private equity IPO