The last few years, from late 2020 until mid-2022, were great for private equity (PE) firms. However, mid-last year, the PE sector started to face headwinds due to recessionary fears. Evalueserve recently conducted a survey of private equity professionals to understand the industry’s current state and gain insights into the sector’s direction in 2023.
Here are nine takeaways from the survey:
- Firms with dry powder (cash reserves) may have the opportunity to attain assets at lower valuations. 72% of survey respondents identified lower valuation as a key opportunity in 2023.
- The dry powder in the market is young. 28% of survey respondents reported their average dry powder age to be less than one year, and another 55% reported an average age between one and two years. And we expect that number to go up, given that institutional investors historically flock to PE over public markets in recessionary times for more stable returns and less volatility.
- The largest percentage – 48% – of survey respondents identified “new deals” as the primary source of fierce competition in 2023. It is shaping up to be a competitive year for new deals in the PE sector because of the near-record amount of dry powder ready to be invested, but firms are more cautious in this environment and are looking for safer investments.
- Macroeconomic and geopolitical factors were thought to be the most significant challenge PE firms will face in 2023 by 62% of survey respondents.
- 2023 may be a difficult year for exits. The IPO market is expected to remain challenging, but PE firms might have success exiting through secondary or trade sales instead. 24% of survey respondents thought exiting investments would be the most significant challenge this year.
- PE firms are preparing for a potential recession by being very selective about their investments. 69% of survey respondents said they were preparing for a potential market slowdown with “highly selective investments.” The next largest group, at 28%, said they were “focusing on existing portfolio.”
- Healthcare, energy, and telecom, media, and technology will be the most attractive sectors for PE investments, according to survey respondents. Not only is healthcare recession-proof, but the importance of the industry was also demonstrated thoroughly by the COVID-19 pandemic. Respondents thought North America and Europe, the Middle East, and Africa (EMEA) to be the most attractive regions for PE investments this year, largely due to their size and number of companies. Asia-Pacific has many emerging, high-growth companies and, as such, will also be an investment destination.
- Environmental, Social, and Governance (ESG) factors are increasingly accepted as value-creating, with 55% of survey respondents reporting ESG factors are somewhat important in making investment decisions. However, investors find it difficult to identify high-quality ESG investments for a few reasons. 31% of survey respondents said “no standardized metrics” were their biggest challenge while looking for ESG investments. Other significant challenges include insufficient reporting and greenwashing, which is when a company intentionally gives a false impression that it’s environmentally friendly.
- PE firms, especially larger ones, are moving along on their digital transformation journeys, evolving from manual processes for analyzing deals, governing portfolio companies, driving value creation, and back-office management. Almost a third of respondents said the PE industry was “transforming how it operates by adopting advanced technologies.” With rising competition and a more difficult PE environment, it’s critical firms adopt technology to create a long-term advantage.
Overall, the outlook for PE looks less optimistic than it has been for the last few years. However, the sector is still expected to grow as it returns to normalcy. In a particularly competitive year, Evalueserve’s experts expect to see more PE firms using advanced technology platforms in the hopes of keeping their competition at bay.