After a year of strength on the private equity front, 2022 is now in the rearview mirror and industry professionals anticipate a downgrade in performance for the coming year.

Despite the fluctuations of the past few years, private equity has withstood the challenges relatively well. However, in certain areas such as exit activity and deal value, the optimism is beginning to slip based on Federal Reserve rate hikes.

These pressures of rising rates are starting to take their toll on the private equity space. Although private equity performance data is delayed, early trends from PitchBook data show PE deal count in the U.S. fell by just over two percent, while the value dropped nearly 20 percent.

The problem for large mega-deals is the increased cost of debt and liquidity. As the Fed works to slow down the economy, lenders are discouraged from loaning money. It’s a double whammy.

For the middle market transactions martinwolf advises on, interest rates are the larger concern, not availability. The Federal Reserve is expected to hike rates by 25 basis points during this week’s policy meeting as inflation starts to ease. We are cautiously optimistic that the economy is stabilizing, increasing the chance we will have a soft(ish) landing, which will help the tech M&A space.

Summary

• Private equity performance was strong in 2022, but industry professionals predict a decline in the coming year due to rising interest rates and Federal Reserve rate hikes.
• Exit activity and deal value have seen some decline, but the overall value of deals in 2022 was still over $1 trillion, higher than in 2019.
• Exits have been staggering since 2021, creating competitive markets, and have also resulted in companies experiencing almost 30 percent less private equity loss, which totals to around $296 billion, 66 percent lower than record-setting levels in 2021. This shift could result in private equity fundraising dropping to below the historic average.
• Leveraged buyouts, a significant portion of private equity, did not experience a decline and shifted to funding from private equity firms themselves.
• Despite challenges, limited partners continued to fund private equity firms, raising $343 billion in 2022, though at a slower pace than in 2021.
• A total of 405 funds raised approximately $343 billion, which is lower than the highs of 2021 but still above 2019’s pace.