Investors continue to favor larger managers and larger vehicles — in the second quarter, nearly half of all capital commitments were raised by a small handful of US$10b-plus funds. Despite the challenging fundraising environment, most private equity funds continue to have ample capital at their disposal, and the industry as a whole is highly unlikely to become capital-constrained in any meaningful way – in total, PE firms have nearly US$1.3t in dry powder available to fund new deals.
While many economists have been calling for a recession for more than a year now, underlying macro performance has remained, in many ways, remarkably resilient. Inflation has moderated without the dramatic impacts on unemployment that many expected, and regulators have responded to shocks in the banking sector swiftly and decisively, ameliorating fears of systemic contagion, at least for the time being. The dichotomy of today’s operating environment — and the challenge for PE — is that these recessionary expectations are creating a stasis of uncertainty that’s keeping many participants locked in wait-and see mode.
PE firms will remain focused on acting opportunistically to invest in high-quality assets in spaces with clear long-term secular tailwinds — software, media, logistics, and health care, for example. They’ll continue their expansion and emphasis on additional asset classes, including secondaries and credit. In credit for example, the accelerated expansion of that asset class — which began in earnest last year when the large banks stepped away from financing PE transactions — will continue, with more companies in the middle market and upper middle market space turning to credit funds for their everyday borrowing needs.
Most important, they’ll remain focused on pulling all available operational levers to ensure that existing portfolio companies not only survive today’s macro uncertainty, but are positioned to outperform as economic growth begins to accelerate.