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The private equity landscape has faced a tumultuous journey in 2023, shaped by the significant impact of higher interest rates on deal economics and gaps in buyer and seller expectations. The first three quarters saw a 28% year-over-year decline in deal volume, with 6,304 deals, reflecting a stark contrast to the post-pandemic peak in the first half of 2022. The total transaction value plummeted by 45%, amounting to $448 billion, signaling a challenging environment for private equity players.

Navigating the U.S. Dip

In the U.S., the third quarter of 2023 witnessed a $145 billion total value, down 6% from Q2 2023. This dip was attributed to a decline in deal count, indicating a shift in the dealmaking landscape. Despite the challenges, dry powder remains high, with an estimated $1.2 trillion yet to be deployed, according to Preqin.

Highlights from the Global PE Outlook

After reviewing the newest Global Private Equity Outlook for 2024 published by Mergermarket and Dechert based on their survey conducted with 100 senior-level private equity firm executives, it is important to highlight several key findings.

Notably, 26% of respondents identify interest rates as the most significant factor impacting deals in the next 12 months. Market conditions for exits are viewed by global survey respondents as neutral or somewhat favorable by 58%. 35% plan to move towards private credit providers in the wake of the U.S. regional bank crisis. Additionally, 94% of respondents are likely to consider take-privates, and 92% utilize earnouts to manage valuation gaps.

Navigating the Currents: Notable North American Market Trends

• U.S. Fund Trends: Facing the Headwinds. Raising funds in this challenging environment has become more complex and time-consuming, with increased competition, especially from larger GPs.
• Deal Trends: Shifting Strategies Stateside. Take-privates have seen a significant increase from 2022, with GPs actively seeking opportunities in the public markets. Distress deals are rising, driven by margin erosion and highly leveraged balance sheets. Financial restructuring expertise becomes crucial in navigating this terrain.
• Deal Environment: Challenges on the Horizon. Higher interest rates have led to lower asset prices, creating a bid-ask spread challenge. Valuation uncertainties and reluctance to transact pose significant hurdles, with 22% of respondents citing it as their primary challenge. Stress tests reveal a 61% increase in commercial Chapter 11 bankruptcies in the U.S. from the start of 2023 to the end of Q3.
• North America Spotlight: A Mixed Landscape. While dealmaking in the U.S. and Canada has decreased since the short-term boom in 2020, volume remains above historical levels. Sponsors are concentrating on smaller bets, evidenced by 2,461 buyouts announced in Q1-Q3 2023, down 33% year-over-year, valued at $248 billion, a 38% decline.
• Private Credit: Shifting Tides. The disruption caused by higher interest rates and banking stresses has prompted a shift towards private credit providers. Thirty-five percent of U.S. respondents plan to move more towards private credit structures, finding them attractive due to flexibility.
• Liquidity Events: The Quiet Markets. In the U.S., the IPO markets have been relatively quiet, with most below their initial prices. M&A activity slowdown and increased debt financing costs have impacted traditional exit routes, with GP responses mixed, leaning towards neutral or slightly negative sentiments.

Charting a Course Forward

When taken as a whole, this paints a nuanced global picture of the industry, showcasing resilience amid challenges. GPs are adapting their strategies, focusing on value creation in portfolio companies, exploring alternative financing options, and actively seeking opportunities in distressed markets and public take-privates. The road ahead demands agility and strategic insight from private equity players navigating the ever-evolving landscape.