The Future of Private Equity Markets: What to expect in the second half of 2022

4 minutes
July 22, 2022

We've benefited from the favorable low-interest-rate climate that has prevailed since 2008, resulting in a record bull run in the private equity market. Fundraising was robust, and interest rates were so low that private equity became an increasingly attractive asset class for investors seeking alternatives to one percent bonds.

With so many funds competing, the complex fundraising process is one of the most significant challenges for private equity fund managers. In addition to raising money from investors and identifying promising firms to invest in, they must also keep track of the portfolio companies effectively to meet expectations.

The future of private equity markets is uncertain, to say the least. As private equity firms confront growing regulations and higher costs, many will likely be compelled to restructure their operations.

Is Private Equity Slowing Down?

Concerns about a global economic recession, rising interest rates, and inflation have sparked many market pullbacks. The asset classes remain in excellent health, but there will be considerable stress, and activity will slow down, particularly this year, as investors become more cautious.

Good assets in private equity will eventually catch up to their valuations, as long as they are adequately capitalized and handled by the appropriate fund managers. Reflecting back to the last economic downturn (the 2008 financial crisis), some of the best vintages in terms of returns have occurred right after the crash. On a relative basis, even the vintages during the crisis outperformed equity markets.

When buyers have a different perspective on valuation and need more due diligence, the conclusion will almost always result in fewer transactions, price adjustments, and more significant restructuring. But as history has shown, a slowdown will result in higher-quality vintages. The most excellent time to boost private equity investments is when consumers slow down on activity.

Putting Dry Powder to Work

Firms are taking a wait-and-see approach to deploy funds due to a valuation lag. Opportunities are becoming rare, and pricing is yet to stabilize. As a result, the dry powder levels have reached an uncomfortable level.

The "dry powder issue" for fund managers is a little perplexing. They desire a sufficient cash reserve in case of market downturns or other unplanned events, while not having too much money stockpiled that it earns little interest.

In the end, there is no such thing as a one-size-fits-all solution to the dry powder problem. Instead, fund managers must devise a technique based on their specific circumstances and goals. But, whatever asset is acquired, value creation will become critical.

The ´take-private´ activity for example also increased over the first half of 2021, and with take-private offerings being one of the best risk-reward opportunities for PE firms, they’re expected to remain a major theme in 2022 and beyond.

Source: PitchBook Q2 European PE Breakdown

European VC dealmaking remains resilient despite the shifts in the market

Vital VC fundraising activity is driven by several factors. For one, investors are still looking for high-yielding assets in an uncertain world. At the same time, high-quality private asset owners do not want to sell in a subprime market that does not offer an attractive exit prospect.

European venture funding is about to exceed EUR 100 billion according to PitcBook’s Q2 European Venture report for the second year in a row, but dealmaking may slow down as markets enter uncertain territory. 

Even though the fund count could reach its lowest level since 2013, rising fund sizes will keep pushing the total value up. As a result, fund managers who can navigate these waters are more likely to be rewarded with high returns.

Adoption of Disruptive Technologies

If you're a fund manager, there's a good chance you're always on the lookout for ways to improve your operation. After all, in today's competitive marketplace, any advantage can make a big difference.

One area often ripe for improvement is the software fund managers use to launch and administer their funds. PE firms, in particular, can benefit from investing in software that helps them get up and running quickly, eliminates friction with investors, and increases retention rates.

By investing in the right software, PE firms can give themselves a natural edge in the market.

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