Cherry Bekaert has published its annual year-end Private Equity Industry Report outlining important developments that impacted the private investment markets in 2023. The report found many headwinds that slowed private equity dealmaking in 2022 continued to impact the industry over the course of last year, causing deal activity to decline sharply for the second year in a row. The M&A environment is now grappling with its longest decline in over a decade.
The report highlights the many challenges faced by the sector over the last 12 months and features data provided by PitchbookTM and other sources, including proprietary Firm data.
Though many of the challenges were carryovers from the previous year (persistent high interest rates and inflation; a stark valuation gap between buyers and sellers; and general market upheavals), other emerging issues dampened deal activity.
Nevertheless, private equity as an asset class continued to show its resiliency as sophisticated dealmakers deployed innovative strategies to keep transaction activity on par with historic pre-pandemic averages.
The report unveiled several key findings, underscoring a trend where, for the second consecutive year, deal activity has trended downward. This trend was characterized by a sharp decline in deal volume and contracting valuation multiples, highlighting the challenges pervading the mergers and acquisitions (M&A) landscape. Deal makers have had to come to terms with the higher-for-longer interest rate environment, further complicated by the fallout from early 2023 bank collapses. These events have not only created longer-term liquidity concerns but also increased capital costs for private investment funds.
The landscape was further complicated by increased regulatory activity, generating uncertainty for limited partners (LPs) and general partners (GPs) alike. This uncertainty stems from various factors, including rulings from the Securities and Exchange Commission (SEC) and mandates related to Environmental, Social, and Governance (ESG) criteria, leading to increased scrutiny from regulators towards fund managers and investors.
Despite these challenges, the report identifies a few bright spots and pockets of opportunity that have generated optimism within the sector. Notably, the proliferation of carve-out and add-on deals has acted as a shock absorber for middle-market deal activity, helping to sustain momentum in the deal market despite significant headwinds. Furthermore, private credit has advanced its market share of M&A loan funding. As traditional lender sources have scaled back on debt funding, direct lending has stepped in to fill the financing gaps left by the pullback in syndicated debt financings.
The middle market, in particular, has shown resilience and outperformed other segments. Although not entirely immune from the stagnation affecting the deal-making world, the decline in the middle market was less acute compared to the broader M&A market. Additionally, the technology and professional services sectors have emerged as focal areas for private equity investment. Technology, especially with the growing segment of artificial intelligence (AI), accounted for nearly one-third of leveraged buyout activity. Meanwhile, professional services have garnered increasing interest from private equity investors, with particular emphasis on categories such as Certified Public Accountant (CPA) firms, wealth management, and consulting firms. This detailed landscape provides a comprehensive overview of the current state of M&A activity, highlighting the challenges, adaptations, and sectors of growth within the industry.
If you want to read the full report you can access the following link.
