Many business owners have a deep-seated concern for the future of their business even after they have sold it. They hope it will grow and flourish and the employees will remain gainfully employed so they can continue to provide for their families. Business owners should be aware of a few facts about private equity and the businesses they back:

 

• For PE deal makers, 2023 was another tough year. Elevated levels of inflation, interest rates, and valuations combined to put a major damper on deal making. Transactions fell 28.9 percent from 2022 while their overall value sank 45.2 percent. Yet there were significant deals, including the $12.5 billion bid for software developer Qualtrics by Silver Lake and CCP Investments, and the planned $9.6 billion acquisition of sandwich chain Subway by Roark Capital Group. The most active sectors were technology, media, and telecom in deal value and industrial manufacturing in deal count. Entering 2024, early signs point to a lifting fog of macroeconomic uncertainty and a turnaround in PE deal makers’ confidence. With record dry powder and moderating valuations, the worst looks to be over—even if the PE M&A market will only pick up steam slowly.

 

• Private equity started strong in 2022 following an historic year for deal making. Then, inflation, rising interest rates, and geopolitical tension created a drag in the second half. Despite the headwinds, the PE industry reported record deal value of $920.2 billion in 2022, and the second-highest annual volume on record of 8,845 transactions. By year’s end, the global PE industry also held nearly $2 trillion in cash, more dry powder than ever. PE firms adapted as conditions declined into 2023, and the vast majority expect their deal activity will remain static or decline over the next 12 months, according to the KPMG 2022 Year-End M&A Survey. We believe that deal activity will begin to pick up in the second half of 2023 with greater certainty that the Fed will have backed off interest rate hikes and the consumer price index will have stabilized. Until then, PE firms are more focused on portfolio performance, but still open to opportunities during a weaker economy and slower M&A market.

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• Private equity's impact on M&A is growing. In addition to 2021 being a record year for fundraising, PEs also put record amounts of capital to work. Global PE dry powder ended 2021 at US$2.3tn, 14% higher than the start of the year—highlighting that there is plenty more M&A to come in 2022. However, fierce competition continues to push up multiples, which has created more pressure on the PE industry to generate returns. That means there is a greater need for financial buyers to bring deeper operational expertise, a greater focus on responsible investment (ESG) and a sharper focus on value creation than ever before. Those able to generate above average returns will be rewarded by increased investor interest, enabling them to deploy these funds through M&A activity in 2022. We expect PE will respond with a number of different investment strategies: Larger, more complex deals, Alternative assets, Innovative companies, Longer investment timelines, Data analytics.

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• Current market conditions with Covid19, have caught the attention of traditional PE fund managers due to the dislocation in credit markets and the investment returns they could provide. With dry powder still on the sidelines, PE fund managers are looking closely at how to invest in distressed assets to enhance returns. For fund managers who already have a credit strategy, markdowns of current portfolios are likely; however, these managers are well positioned to identify, execute and operationalize new investment decisions to enhance portfolio returns. 1,384 PE deals closed in Q1 2020 for a combined $186.4 billion—YoY gains of 7.3% and 6.0%, respectively. These figures were boosted by deals that had been negotiated before COVID-19’s effects on the US economy were felt. For example, the largest deal to close in the quarter was announced in May 2019.

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• US PE deal activity topped 5,000 deals and two-thirds of a trillion dollars in 2019. Despite year-end figures falling lightly short of 2018’s mammoth $730.3 billion deal value, we believe the industry remains strong and that a minor YoY dip is not indicative of a pullback in PE dealmaking. PE activity comes in uneven spurts; deal value fell in 2015 before posting a significantly higher sum in 2016.

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• At the start of Q3 2018 there was a record 3,037 private equity funds in the US for investors to choose from, targeting an aggregate $948 billion US dollars.

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• The dry powder of global private equity companies amounted to over $1 trillion US dollars at the end of 2017 with $961.5 billion to private equity and $145.4 billion allotted to venture capital.

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• First-time private equity fund managers secured $26 billion US dollars in capital commitments across 226 funds in 2017.

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• 921 private equity funds reached a final close, securing just over $453 billion US dollars in 2017, the largest amount of capital raised in any year.

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• As price-to-EBITDA multiples paid in the private markets converge with valuations in the public markets, more public companies become potential take-private targets. The total value of these buyouts surged to $180 billion US dollars in 2017, nearly twice the level of the year before.

 

Based on many years’ experience we have seen this first hand and we believe this is due to several key ingredients brought together under private equity investment. These include a typical focus on organic growth rather than the often wrongly assumed cost cutting measures. Simply reducing the overhead expenses of a business certainly will not allow it to grow and may reduce its position in the market and more importantly reduce its value.

 

Typically private equity will invest significant capital in a business where an individual owner is simply unable or unwilling to do so. Private equity usually has gained a broader range of experience in various businesses and industries to draw on over an individual owner who has a more narrow experience base even though they may have a deep knowledge of their own business operations. Private equity also typically has a very extensive talent pool of experienced individuals from which to call upon.

 

* Some selected data from Pitchbook quarterly reports