In contrast to the remarkable levels of deal activity seen in 2021, the last 12 months have been more challenging for private equity investors. Faced with the headwinds of increased inflation, Russia's invasion of Ukraine causing geopolitical instability, high energy prices, uncertainty around supply chains and rising interest rates, 2022 saw a measure of slowdown in PE deal pipelines in line with broader M&A deal activity.

As we look ahead to 2023, investors remain cautiously optimistic about the opportunities created by volatility in the markets and as they seek new avenues to deploy capital. After all, history has shown that the best performing vintages of private equity funds are often those invested during downturns and that private equity outperforms other asset classes by a greater margin when recessionary forces are at play.

Bridging the gap between sellers and buyers on valuation of assets will be critical after years of seller-friendly deal terms and record-high exit multiples. Price discipline and deep sector experience to diligence assets will be key. In addition to intensified levels of diligence, we may see the return of value adjustment mechanisms such as earn-outs and seller notes. Also, in line with historic trends, U.S. investors will seek opportunities to spend their dollars on UK assets and businesses during periods of downturn, particularly where UK businesses have resilient, recurring cash flow, given the weakness of the pound against the dollar.

Private equity investors will also continue to pay close attention to take-private and corporate carve-out transactions. Large take-private transactions remain an efficient way to write big equity checks where historically public market valuation has lagged behind private valuations. As listed companies and other large corporates carry out strategic reviews and focus their attention on core business areas across fragmented business lines, private equity investors remain poised to execute carve-out transactions.

Increased cost and general availability of debt financing has slowed deal activity in the short term, but this could pave the way for more co-investments and other forms of private equity investments. Liquidity remains at the top of the agenda for GPs and LPs, and, with exits looking potentially more challenging (particularly in the large cap space given the uncertainty around the availability of debt financing), fund managers are using GP-led secondaries and continuation fund vehicles to realise liquidity and hold onto quality assets while simultaneously returning capital to LPs. Additionally, investments where leverage is less critical such as growth equity investments have experienced a large volume uptick with many PE sponsors raising dedicated growth funds to meet investor demand.

In summary, while 2023 will not be an easy environment in which to execute deals, we anticipate the high levels of dry powder to translate into selective investments in a wide range of private equity investment strategies ranging from buyouts to co-investments and secondary transactions.

For further views about what we think lies ahead over the coming months - as well as a snapshot of our highlights from 2022 - please click here.

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