Private equity – Feature
PRIVATE EQUITY: RISE AND FALL?
Has private equity peaked as we head into a new investment environment? Fiona Nicolson delves deep into the market to find out.
Private equity “blew the doors off” in 2021, says consultancy Bain & Co when summing up what was a record-breaking year for the asset class. But the landscape has since shifted and the backdrop has changed. Following the “stimulus-fuelled market frenzy of 2021”, last year was a turbulent year for risk assets, says Preqin in its 2023 global report on private equity. The investment data specialist noted that the global private equity market is now in an adjust- ment period and anticipated significantly weaker levels of activity this year in terms of deal-flow, as well as in perfor- mance and fund-raising.
Also, while its 2023 alternative assets report acknowledged the strong returns that private equity has delivered to investors over the long term, Preqin said it expects performance to dip this year.
The surge in activity has ebbed, as major new challenges have made an entrance, while others in the background have moved to centre stage.
The challenges for the market have arrived thick and fast dur- ing the past few years. These include geopolitical tension ema- nating from the war in Ukraine and China’s focus on Taiwan, along with burgeoning inflation, rocketing interest rates and market volatility. And that’s not all. According to Bain & Co’s global private equity report for 2023, a host of other macro-economic trends have been having an impact too, such as natural resource shortages, global food pricing and supply disruption, recession risks and technological disruption.
Seen it all before However, despite the tumultuous times, Bain’s outlook is upbeat. “Despite the recent drop-off in deal, exit and fund-rais- ing activity, 2022 was still the second-best year in history, and the underlying fundamentals remain sound,” the company reports.
While it points out the challenges faced by private equity, it also highlights the robustness of the sector: “Unlike the 2007–08 period, when the global banking system nearly collapsed, noth- ing appears fundamentally broken this time around. While all signs point to a shift in the economic tide, the magnitude will be nothing the private equity industry hasn’t dealt with before.” Putting the macro-economic worries to one side, the year has started on an encouraging note. In its end of first quarter report on private equity, Preqin pointed out that there’s an am- ple amount of dry powder in the market globally – a healthy $1.54trn (£1.24trn). Total dry powder will climb to $1.92trn (£1.54trn) by 2027, it estimates in its 2023 global private equity report.
This positive outlook on private equity is evidenced in the plans of institutional investors. According to a global report on pri- vate markets published by State Street in May, nearly two- thirds (62.5%) of major institutional investors surveyed plan to make private equity their largest allocation in the next few years. The research also revealed that despite the tough macro environment, private equity is still the most popular private market.
Issue 124 June 2023 | portfolio institutional | 47
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