Private Equity Investment: Trends To Expect In 2023 – Corporate and Company Law

In contrast to the remarkable levels of deal activity seen in
2021, the last 12 months have been more challenging for private
equity investors. Faced with the headwinds of increased inflation,
Russia’s invasion of Ukraine causing geopolitical instability,
high energy prices, uncertainty around supply chains and rising
interest rates, 2022 saw a measure of slowdown in PE deal pipelines
in line with broader M&A deal activity.

As we look ahead to 2023, investors remain cautiously optimistic
about the opportunities created by volatility in the markets and as
they seek new avenues to deploy capital. After all, history has
shown that the best performing vintages of private equity funds are
often those invested during downturns and that private equity
outperforms other asset classes by a greater margin when
recessionary forces are at play.

Bridging the gap between sellers and buyers on valuation of
assets will be critical after years of seller-friendly deal terms
and record-high exit multiples. Price discipline and deep sector
experience to diligence assets will be key. In addition to
intensified levels of diligence, we may see the return of value
adjustment mechanisms such as earn-outs and seller notes. Also, in
line with historic trends, U.S. investors will seek opportunities
to spend their dollars on UK assets and businesses during periods
of downturn, particularly where UK businesses have resilient,
recurring cash flow, given the weakness of the pound against the
dollar.

Private equity investors will also continue to pay close
attention to take-private and corporate carve-out transactions.
Large take-private transactions remain an efficient way to write
big equity checks where historically public market valuation has
lagged behind private valuations. As listed companies and other
large corporates carry out strategic reviews and focus their
attention on core business areas across fragmented business lines,
private equity investors remain poised to execute carve-out
transactions.

Increased cost and general availability of debt financing has
slowed deal activity in the short term, but this could pave the way
for more co-investments and other forms of private equity
investments. Liquidity remains at the top of the agenda for GPs and
LPs, and, with exits looking potentially more challenging
(particularly in the large cap space given the uncertainty around
the availability of debt financing), fund managers are using GP-led
secondaries and continuation fund vehicles to realise liquidity and
hold onto quality assets while simultaneously returning capital to
LPs. Additionally, investments where leverage is less critical such
as growth equity investments have experienced a large volume uptick
with many PE sponsors raising dedicated growth funds to meet
investor demand.

In summary, while 2023 will not be an easy environment in which
to execute deals, we anticipate the high levels of dry powder to
translate into selective investments in a wide range of private
equity investment strategies ranging from buyouts to co-investments
and secondary transactions.

For further views about what we think lies ahead over the coming
months – as well as a snapshot of our highlights from 2022 – please
click here.

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