Private equity: US Deals 2023 midyear outlook

Private equity embraces new investment strategies

The start of 2023 has seen a continuation of 2022’s significant slowdown in PE-related deal activity as buyers and sellers navigate ongoing macroeconomic turbulence, challenging debt markets and global geopolitical uncertainty. Over the past year, PE-related deal volumes have declined ~30% (Q1 2022 to Q1 2023), taking the market back to pre-COVID levels. However, while volumes continue to fall, aggregate deal value has ticked up modestly each quarter since the post-COVID plunge, reflecting opportunities to get deals done given the right asset, strategy and value-creation plan. These opportunities are most prevalent in segments with broader market tailwinds, such as infrastructure and renewables (with significant boosts from the IRA) and healthcare, where new waves of innovation continue to drive activity.

We expect deal scarcity to remain as long as buyer and seller expectations on valuations remain mismatched. While we see some early signs of a narrowing of the gap, there’s a long way to go before large platform investments reach 2021 levels. 

Explore national deals trends

At the same time, PE firms sit atop unprecedented dry powder reserves (about $1.1 trillion in the US), in part reflecting reduced outflows. As a result, we continue to expect creative approaches to deploying capital (minority investments, all-equity deals, private placement of debt). The ability to provide access to debt, in particular, is likely to remain a differentiator given ongoing uncertainty around interest rates. For diversified funds willing and able to support diverse sources of finance — for their own deals and others — this could open up a considerably broader pool of opportunities not available to other funds.

To win in this challenging environment, private equity firms must adapt in response to both the acute conditions on the ground and longer-term trends that continue to rise on investment committee agendas, such as talent, digital transformation and ESG.

A renewed emphasis on integration for a core PE Play

Platform building remains a key component of most PE strategies — but even experienced investors and operators face challenges in delivering on the potential of bolt-on and transformative acquisitions. In particular, our survey finds concerns around fully capturing cost savings, delivering on any revenue synergies and, in particular, managing culture and team dynamics through transactions. There is significant benefit to building out M&A capabilities early in an investment, to maximize the value realized through the life of the platform.

Learn more about leading practices and transformational mindsets in PwC’s new M&A integration report.

Key deal drivers 

Opportunity amid uncertainty

The current period of uncertainty in global markets and economies is driving a sustained bout of introspection among large public companies, with many considering large carve-out, spin-off or take-private transactions. These actions have multiple aims, including a need to maximize strategic focus, prune underperforming businesses, transform core businesses and, in some cases, raise cash.

PE investors have been significant beneficiaries of this trend, with take-private and carve-out transactions being a bright spot in the first few months of 2023. 

We see continued opportunity for PE to pursue major acquisitions in this environment. The most successful investors will be those who are proactive in identifying actionable public targets (those with sound fundamentals but which are non-core or face near-term headwinds), developing a compelling value creation strategy and bringing differentiated capabilities spanning talent, digital and strategy to execute on the deal.

While PE deal volume continues to drop, value is slowly recovering, and significant dry powder reserves suggest potential for significant activity as conditions improve.

Necessity for business reinvention

Changing macro conditions have significantly changed how PE firms evaluate their portfolio companies’ growth strategies. The slowing economy combined with stubbornly high valuations means PE firms are no longer able to rely on overall double-digit market growth and minor cost take-outs or bolt-on acquisitions to meet IRR targets.

Instead, private equity firms must now embrace portfolio company value creation as the primary mechanism for growth, with a particular focus on digital and talent transformation in addition to driving ESG initiatives to position their investments for sustainable development.

Moreover, the decrease in M&A volumes leaves private equity firms with little margin for error when considering acquisition targets. Consequently, there’s a heightened emphasis on integrating value creation into the diligence process. This ensures that the selected targets align with the firm’s growth plans and have a clear roadmap for future growth.

In addition, PwC’s recent divestiture study found that timely execution of divestiture decisions can help provide capital for reinvestment into core operations. Given the challenges of the current economic environment, more companies may embrace divestitures as part of their transformation process — which could lead to targeted opportunities for PE. 

Capital allocation

Growing LP preferences for more diversified portfolios and the current slowdown in traditional buy-out opportunities will likely push private equity firms (particularly megafunds) into developing additional vehicles beyond their traditional core buy-out funds. Major areas of focus will include infrastructure and real estate, given both significant capital deployment opportunities and relatively predictable returns as well as novel fund types focused on ESG driven by strong LP interest. At the same time, novel vehicles supporting the entrance of retail investment dollars into private capital will continue to buoy overall capital pools.

In addition, rising interest rates and overall capital concerns from banks have created an opportunity for large private equity firms to offer private debt financing to facilitate deals, both their own and their rivals. 

“PE firms must adapt to both the current dealmaking conditions and longer-term trends. Successful investors use digital tools to rapidly identify targets, unlock and deliver value, while focusing on talent and ESG strategies to position their investments for sustainable development.”

— Manoj Mahenthiran, US PE Deals
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