Private equity hits the brakes in choppy global market

Private equity (PE) deal activity shrinks as buyer and vendor pricing expectations widen and rising interest rates drive significant tightening in acquisition finance markets

PE managers endured a testing year in 2022 as macroeconomic volatility, a tougher fundraising backdrop and climbing debt costs sparked double-digit declines in deal value and volume.

Global PE-backed deal value for 2022 came in 40% down year-on-year at US$1.3 trillion, with deal volumes off by almost a fifth (19%) at 8,168 transactions. Quarterly deal figures gradually regressed through the course of the year with value and volume declining in each quarter as dealmaking conditions deteriorated.

The pinch has been felt on both new deals and exits—buyout deal value dropped 46% year-on-year to US$845.9 billion and exit value slid 26% to US$462.4 billion.

Multiple headwinds dampen deal appetite

The large drop-off in PE deal numbers came as dealmakers coped with multiple headwinds.

On the fundraising front, managers faced a contracting fundraising market for the first time in years as increasingly risk averse institutional investors pared back their PE programs. According to Preqin, global PE funds raised US$405 billion in the first nine months of 2022, with the market forecast to see a fundraising decline of more than 20% for 2022. Conditions are set to remain tough, with Preqin anticipating a further 2.7% decline in fundraising takings in 2023.

After a record year of dealmaking and deployment in 2021, some managers found themselves ahead of deployment schedules and held back from making any new deals in 2022. Instead, many chose to hold on to their fund reserves and avoid an early return to the fundraising market.

Rising acquisition finance costs and reduced debt availability also had an impact. In the US and Europe, margins on institutional leveraged loans climbed through the course of the year, chilling the issuance of buyout finance, which dropped in the US and Europe in 2022.

With financing harder to come by, PE firms have been reluctant to pursue big ticket transactions at high prices in an uncertain market. Vendors have been equally cautious. Rather than selling into a falling market at a lower valuation and running the risk of a broken deal process, some managers opted to put sales of assets on ice temporarily.

The growing gap between vendor and buyer pricing expectations is expected to remain a feature of PE dealmaking early in 2023, locking the market into a period of stasis as firms recalibrate valuation expectations and risk appetite.

Quality assets in resilient sectors still in demand

As tough as the year has been for PE dealmakers, the willingness to invest in select assets in resilient sectors has held up.

Companies providing mission-critical software and technology to resilient customer bases have continued to attract substantial interest from sponsors. Technology, media and telecom (TMT) accounted for five of the 10 largest buyout deals in 2022, including a US$10.4 billion bid for Zendesk by a consortium comprised of Hellman & Friedman, Permira, ADIA and GIC, and Brookfield’s US$15.3 billion move for Nielsen.

Other sectors offering protection against downside risk and a degree of insulation from rising inflation also secured PE backing, such as infrastructure and logistics.

On the exit side, firms holding sought-after assets have been able to get deals done too—and without compromising on valuations. Nordic Capital and Five Arrows, for example, sold UK specialty diagnostics company The Binding Site to US strategic buyer Thermo Fisher in a deal worth US$2.6 billion that is understood to have commanded a multiple on invested capital of 19x.


The ability to continue closing deals and landing exits in difficult markets will remain crucial for PE managers moving into 2023, but there are reasons for optimism.

Fundraising has become harder and more drawn out, but blue chip managers continue to enjoy strong support from their investors, as observed in the fundraising of Clayton, Dubilier & Rice’s (CD&R) twelfth fund. CD&R is seeking US$20 billion for the new vehicle and, by the end of December, had already raised US$15 billion toward its target.

Even managers that are not ready to test the fundraising waters just yet are well-capitalized, having taken advantage of a buoyant fundraising market in 2021. Financial sponsors are replete with capital and sitting on dry powder in excess of US$1 trillion. With deal multiples tracking lower, cash rich PE firms may be well-placed to pick up good assets at attractive prices when deal activity rebounds.

On the financing front, meanwhile, there are hopes that inflation and interest rates will flatten out at some point in 2023 and help to reopen debt markets. Even absent abundant bank and capital markets activity, however, sponsors have benefitted from the growth in the private credit space, with debt funds stepping in to fill the funding vacuum and provide debt packages of increasing size and flexibility.

It is also important to note that, although 2022 PE deal numbers have fallen significantly from the record highs of 2021, the last year does compare favorably with long-term annual averages. Indeed, PE dealmaking in 2022 represented the second-best year for the asset class since the M&A boom of 2007, and sponsor dealmaking accounted for 6.2% of global M&A deal volume in 2022, the highest share for PE in a decade.

Conditions may be tougher than a year ago for PE, but the asset class remains in a stable position for the months ahead.

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