2023

Global Private
Equity Outlook
Contents
Introduction: A state of flux 4

Key findings 6

Deal environment: Challenges, processes and auctions 8

APAC spotlight 14

Fund trends 16

Private credit 21

North America spotlight 24

Creative approaches 26

Buy & build  32

Carve-outs  34

EMEA spotlight 36

Liquidity events 38

ESG42

Conclusion48

Methodology
At the beginning of the third quarter of 2022, Mergermarket, on behalf of
Dechert LLP, surveyed 100 senior-level executives at private equity (PE)
firms based in North America (45%), Europe, the Middle East and Africa
(EMEA) (35%), and Asia-Pacific (APAC) (20%). To qualify for inclusion,
a firm needed to have US$1bn or more in assets under management and
respondents could not be first-time fund managers. The survey included a
combination of qualitative and quantitative questions, and all interviews
were conducted over the telephone by appointment. Results were analyzed
and collated by Mergermarket, and all responses are anonymized and
presented in aggregate.
Introduction:
A state of flux

A year ago, the PE industry quarters of 2022 as the PE NUMBER OF GLOBAL BUYOUT DEALS, 2017–Q3 2022
was in full swing. Deal activity industry adjusted to tighter
had spiked to levels never conditions and a clear pivot 8,000
previously witnessed and towards lower risk across 1,694
1,425
credit was on tap amid the asset classes. The number of 6,000
Number of deals

loosest monetary conditions deals dropped by 18% year on 1,948

1,061
4,000 966
buyout fund managers have year, to a total of 4,694 deals 961
1,017 933 1,374
1,915 1,642
ever experienced. To say that in the first three quarters of 919 966 1,003
1,013
2,000
2021 was an outlier is an 2022. Total value fell even 956 1,021 989 699
1,854 1,991
understatement. Fast forward to more steeply, almost halving 0
793 947 907 921

the second half of 2022, and from US$1.2tn in the Q1-Q3 2017 2018 2019 2020 2021 2022
dealmakers are contending with of 2021 to US$685bn in the
markedly less accommodative same period of 2022. The Q1 Q2 Q3 Q4
market conditions. overall decline in deal activity
accelerated more sharply in the
Despite the fall-off from 2021, third quarter. There were only VALUE OF GLOBAL BUYOUT DEALS, 2017–Q3 2022
global private equity (PE) deal 1,061 PE deals globally in Q3,
activity has remained above significantly lower than the two 1,600
$324.6
pre-pandemic levels, and the previous quarters (1,991 in Q1
1,200
market share of PE transactions and 1,642 in Q2).
Value (US$bn)

$423.1
as a proportion of global M&A
800
activity has continued to This gap between volume $128.1
$459.9
steadily grow, reaching a record and value is to be expected $132.7 $127.8 $153.5 $229.6
$265.0
400 $151.2
$138.6 $136.5
23% as of Q3 2022, according given the tightening cycle that $169.8
$179.9 $180.5
$162.4
$98.6 $357.2 $291.9
to Refinitiv. central banks have embarked 0 $90.1 $139.8 $121.2 $141.1

on this year. Nowhere is this 2017 2018 2019 2020 2021 2022
Even so, deal activity more evident than the United
experienced a significant States (US), where the Federal Q1 Q2 Q3 Q4

slowdown in the first three Reserve has made clear its

4
commitment to tamping down
inflation, raising interest rates
Dealmakers are contending with
six times this year alone,
bringing rates up from 0%-
markedly less accommodative
0.25% to 3.75%-4.00% by market conditions.
November. This was the fastest
rate of increase in Fed history—
and Fed officials have indicated New capital important global fundraising
that they aren't done yet. When it comes to fundraising, challenge to their firm being
PE managers are finding that large LPs concentrating their
This hawkish push and the the firehose of capital is starting investment relationships with a
specter of weakened growth has to taper off. PEI data show that smaller number of funds.
had a clear impact on credit PE fundraising dropped 16%
markets and, in particular, on by value and 30.6% by the Rates and costs
leveraged financing conditions. number of funds closed through Geopolitical risks continue
The cost of capital is increasing Q3 2022 compared with the to loom large following the
and investors are showing same period last year. breakout of war in Ukraine at
reluctance towards buyout the beginning of the year. This
debt. This is one of the most, This is a consequence of the is more of a concern for pan-
if not the most, defining rout in public markets, which European GPs with exposure
characteristics of today’s PE has seen limited partners to the weakened energy supply
market. We find this year (LPs) overexposed to PE as a chain and assets in Eastern
that 42% of North American consequence of the denominator Europe. Current events are
respondents and 40% of APAC effect. Inflation and lower making inflation particularly
respondents agree that the appetites for risk are making pernicious in this market. This
availability and cost of leverage investors far more discerning is likely to direct PE managers‘
amid monetary tightening is a about where and to whom they focus toward steeling their
top challenge currently facing allocate their capital. existing portfolio companies by
the PE industry. managing costs, and capital
This will inevitably lead to will be deployed judiciously.
We therefore anticipate that longer fundraising cycles, This instinct is not confined to
the remainder of 2022 and with general partners (GPs) Europe. The two-sided squeeze
potentially much of 2023 will on average having to remain of rising costs on one side and
look similar to the first three on the road for longer. It is rising rates on the other is a
quarters of this year, with also favoring managers with challenge for the global PE
relatively greater activity in the extensive track records and industry at large.
middle-market, as large-cap with whom LPs have existing
deal flow takes something of a relationships. In turn, this will There is no question, then, that
breather after last year’s excess. further concentrate capital in these are testing times. The PE
Until inflation is tamed—and the hands of a few firms, a industry has shown that, as a
historically it has been a trend that was already in play proactive steward of portfolio
tough nut to crack—PE fund before the pandemic and which companies with a decades-long
managers can expect the high- shows few signs of abating. track record, it can successfully
yield bond and syndicated loan This is top of mind for GPs, weather difficult market
markets to remain challenging. according to our research. conditions. Now it is once again
Across all regions, we find that being asked to demonstrate
28% of GPs see the single most that resilience.
5
Key Findings
42% 82%
of North American and 40% of APAC respondents of North American respondents and 80% of EMEA
agree that the availability and the cost of leverage respondents are optimistic that market conditions
amid monetary tightening is a top challenge for PE liquidity events in the next 12 months will be
currently facing PE. more favorable.

37% 51%
believe retail access to PE of respondents say that their
vehicles will expand as an firms' use of private credit
after-effect of the COVID-19 financing has increased in the
crisis. past three years.

65% 40%
of APAC respondents and 58% of of APAC respondents say the single most important global
North American ones say they have fundraising challenge to their firm is that of large LPs
increased their use of private credit concentrating their investment relationships with a smaller
to finance buyouts. number of funds. 32% of EMEA and 20% of North American
respondents agree with this.

6
7
Deal environment:
Challenges, processes
and auctions
GPs around the world have WHAT DO YOU SEE AS THE BIGGEST CHALLENGES CURRENTLY FACING THE PRIVATE
one thing in common: debt EQUITY INDUSTRY? (SELECT TOP TWO)
concerns. This is the one
challenge that fund managers 40%
Availability and cost of leverage
across different regions agree amid monetary tightening
37%
on—between 37% and 42% of 42%
respondents from each region
agree that the availability 50%
Exiting investments profitably
and the cost of leverage amid enough to exceed hurdle rate
46%

monetary tightening is a top 29%

challenge, making it the most-

15%
selected answer option from the Competition for limited 49%
respondent pool as a whole. deals and high multiples
38%

Central banks around the world 25%

are taking different approaches. Valuation uncertainties making buyers 20%
Across major, developed buyout and sellers reluctant to transact
42%
markets, the US is taking the
lead with the fastest pace of 25%
tightening in recent history. Inflation and/or slowing economic growth 34%
Europe is beginning to follow 22%
suit. APAC is taking a mixed
approach, with China being an 45%
outlier in that it has limited Region-specific factors (e.g., 14%
macroeconomic and geopolitical issues)
inflation and is in fact loosening 27%
monetary policy amid a growth
slowdown. But the fact remains
Asia-Pacific EMEA North America
that, in a more risk-averse

8
environment, deal financing will
be harder to come by, especially
respondents see exiting
investments profitably enough
“We’re seeing valuation
at the upper end of the market. to exceed hurdle rates as
being one of the largest
gaps between seller
Last year, valuation gaps were
of little concern as there was
obstacles right now, with an
additional 45% pointing to
expectations and what
considerable bidding strength
for assets. With public equities
region-specific macroeconomic
and geopolitical issues. The
buyers are willing to pay.
having softened significantly COVID-19 situation and Parties are looking at
during 2022, buyers are taking renewed lockdowns in China in
a far more cautious approach. the first half of the year have ways to creatively bridge
Meanwhile, sellers may remain been of particular concern
wedded to EBITDA multiples as well, as this exacerbated those gaps in auctions.”
they have seen in recent already fraught supply chains.
years, which may no longer be Economists have been trimming Markus Bolsinger, Dechert LLP
realistic. More than two fifths their forecasts of China’s GDP
(42%) of North American growth for both this year and
respondents say valuation 2023 as a consequence of its
uncertainty is among the top zero-COVID policy and signs
two challenges the PE industry of credit stress in its property
is facing. market. a longer time, which affects
the funds’ IRRs. As a result,
“Multiples went up significantly “There’s been a lot of hurdle rates have been harder
over the last two or three uncertainty and fluctuations in to achieve. We’re also therefore
years. There is a lag between the public markets in China, seeing a lot of continuation
public and private markets, fueled in part by the tech funds as a means of investors
and over the coming months crackdown, that have spooked realizing liquidity,” adds Boon.
it should be expected that a investors,” says Siew Kam
price contraction of PE portfolio Boon, a partner in Dechert’s Forthcoming challenges
companies will play out,” says Singapore practice. There is a clear focus of
Markus Bolsinger, co-head of attention on the impact
Dechert’s PE practice. “We‘re Hitting hurdle rates is less of that rising interest rates
seeing valuation gaps between a concern in North America, will have on the dealmaking
seller expectations and what where PE returns have environment. An overwhelming
buyers are willing to pay. historically been strong, and 80% of Asia-Pacific
Parties are looking at ways to the depth of liquidity has made respondents point to rate
creatively bridge those gaps in for a healthy exit environment. hikes as being a leading
auctions. At the higher end, That contrasts with APAC, development that will
the inability to obtain attractive where internal rates of return influence deal activity over the
financing is putting a lot of (IRRs) have been stymied by next 12-18 months. APAC is
deals on hold.” the relatively constricted exit notable for having a patchwork
market. “APAC has traditionally of monetary policies. In China,
In APAC, the greatest had fewer exits compared with the largest buyout market in
perceived challenge is more North America and EMEA and the region, interest rates are
local in nature. Half of these many of these exits have taken being lowered in an attempt

9
to revive credit demand and IN YOUR ESTIMATION, WHICH CURRENT OR UPCOMING DEVELOPMENTS WILL HAVE
boost the economy following THE BIGGEST EFFECT ON THE DEAL ENVIRONMENT OVER THE COMING 12-18 MONTHS?
the slowing effect of COVID-19 (RANK THE TOP THREE 1-3, WHERE 1 IS MOST IMPORTANT)
lockdowns and to support its
debt-laden property markets.
80%
Concurrently, India has been
Increasing interest rates 57%
taking the opposite approach,
upping its rate by 50 basis 44%

points in August to 5.4% to

cool rising prices. 40%
Higher corporate and/
57%
Sizable proportions of EMEA or capital gains tax rates
51%
respondents (57%) and North
America respondents (44%)
25%
also highlight rates as being Geopolitical conflict
one of the most impactful including Ukraine war
43%

variables on deal conditions. 49%

The US is well ahead of
Europe in its tightening 50%
ESG factors in business
cycle—the European Central (e.g., climate change, 20%
Bank (ECB) hiked up key diversity, governance issues)
33%
interest rates three times this
year, compared to six hikes the 20%
Fed have implemented so far Civil unrest and populism slowing
economic growth and the 34%
in 2022. This is despite the potential for recession
29%
fact that inflation in Europe is
outstripping the US, a function
15%
of Europe’s greater exposure Ongoing supply chain disruptions
affecting portfolio 29%
to energy supply disruptions company performance
stemming from the war in 29%

Ukraine. With the European

Central Bank having further 15%
Rising portfolio company
to go to stop inflation in its costs from inflation
31%
tracks, the relative impact of 27%
rate hikes is still to come in
much of EMEA compared with 40%
Increased regulatory scrutiny
the US. (including foreign investments, 20%
antitrust enforcement, etc.)
20%
Higher rates will mean higher
financing costs. This will 15%
not only affect new deals China economic slowdown
9%
but existing holdings where and corporate debt issues
18%
floating rates have not been
hedged. For companies with
ample margins, this will
Asia-Pacific EMEA North America
not be a problem. However,

10
if economic growth slows “There’s been a lot of uncertainty and
significantly or contracts,
revenue and earnings growth fluctuations in the public markets in China,
will mostly follow and in many
cases revenues and earnings fueled in part by the tech crackdown, that
at portfolio companies will
decline. In highly levered have spooked investors.”
capital structures, this will
raise the prospect of business Siew Kam Boon, Dechert LLP
insolvencies and distressed
restructurings.
on the deal environment in More ambitious efforts are
In the case of new the next 12 months (57% and currently being made by the
transactions, there is a silver 51%, respectively). In the OECD to coordinate a 15%
lining to higher rates and US, the Inflation Reduction minimum global corporate
leverage costs. Over the past Act contains a 15% corporate tax rate. This would have the
decade, cheap debt combined minimum tax for companies effect of preventing large
with a superabundance of that make in excess of multinational companies from
equity capital has made for US$1bn a year. An analysis by relocating their profits to other
frothy valuation multiples, Credit Suisse suggests that the jurisdictions. Instead, they
which has made buying value impact is likely to be limited. would have to pay more taxes
a major challenge. Higher The bank found that just over in countries where they have
interest rates should attract 170 companies in the S&P customers and less in low-tax
investor capital toward fixed 500 paid less than 15% in jurisdictions where they base
income, in turn slowing PE taxes in 2021 and that less their headquarters.
fundraising. At the same time than half of these are likely to
as PE capital becomes less see an increase in 2023 as the Asia-Pacific respondents
abundant, higher financing legislation allows companies are far less concerned by
costs should also rein in to use adjusted earnings. the potential impact of tax
deal bid levels. This could In addition, the Inflation developments on the deal
result in a compelling buying Reduction Act imposed a environment than they
environment for those firms 1% tax on stock buybacks by are about the gamut of
that are sitting on dry powder public companies, beginning environmental, social and
or are successfully raising in 2023. The full scope of governance (ESG) factors,
funds and take a prudent the tax is not yet known, but including climate change,
approach to leverage, seizing due to the broad statutory diversity and governance
on the opportunity to buy at language, the tax could issues, as being a possible
attractive entry prices. apply in some LBOs, special bottleneck. Half of the
purpose acquisition company respondents from this region
Tax is another focal point. Both (SPAC) transactions, tax-free saw this as among the top
EMEA and North American transactions with taxable three biggest areas of concern.
respondents were more likely boot, among others. While
to say that they expect higher not significant, the tax could APAC is generally considered
corporate or capital gains tax impact transactions at to be far less mature in its
rates to have the biggest effect the margins. commitment to ESG than other

11
regions, especially Europe, WHAT TRENDS DO YOU SEE GROWING AS AN AFTER-EFFECT OF THE COVID-19 CRISIS?
which has led the regulatory (SELECT ALL THAT APPLY)
push. A recent survey of
business executives carried out
by the Harris Poll and Google More club deals to limit exposure 72%
Cloud found that almost a third
of those in the APAC region
believe their organization is More distressed deals 67%
as interest rates rise
mostly focused on revenue
growth even if it is harmful for GP-led secondaries/fund restructurings/
the environment, and more than continuation funds to extend the 65%
half think their organization is life of existing funds/investments

not serious about sustainability

commitments. Therefore, APAC Greater emphasis on ESG 63%
GPs may be looking at the road
ahead and the progress that
needs to be made as global Acceleration of fundraising 60%
institutional LPs increasingly
prioritize ESG.
Increase of add-on acquisitions
59%
for existing portfolio companies
COVID’s shadow
COVID-19 continues to cast
More co-investment opportunities
a long shadow. Expansionary 58%
to limit exposure
policy helped keep the global
economy afloat, but the
51%
downstream effects of those More seller reinvestment opportunities

policies coupled with ongoing

supply chain challenges are Less travel and more remote
50%
now being felt the world over, processes (e.g., due diligence)
causing runaway inflation that
has dampened demand. Increase of teaming up
47%
with strategic partners
On considering which trends
are expected as a continued Expanding retail access
37%
after-effect of the COVID-19 to private equity vehicles

crisis, 72% of respondents

point to an increase in club 37%
Increase in take-private transactions
deals to help limit exposure.
When PE firms team up on
Trading vintage, successful portfolio
deals, not only can they share companies to successor funds 35%
insights and expertise for the (with the appropriate approvals)
benefit of the target company,
they also spread their downside New industry or sub-sector focus 18%
risk, which is especially
pertinent at this point in time.

12
HOW DO YOU EXPECT THE USE OF REPRESENTATION AND WARRANTY INSURANCE OR WARRANTY AND
INDEMNITY INSURANCE TO CHANGE IN EMEA/ASIA-PACIFIC/NORTH AMERICA IN THE COMING 12-18 MONTHS?
(SELECT REGION ACCORDING TO RESPONDENT REGION)
60% 55%
51%
50%

40%
33%
31% 31%
30% 25% 26%
23%
20% 15%

10% 5% 5%
0% 0% 0% 0% 0%
Decrease significantly Decrease slightly Stay about the same Increase slightly Increase significantly
to moderately to moderately
Asia-Pacific EMEA North America

Last year, there was notably EMEA and APAC, comes into A majority of respondents in
less expectation of more club sharper view. These policies each region expect the use of
deals being a major trend, protect buyers against any RWI insurance over the coming
highlighted then by less than inaccurate representations, 12-18 months to increase in
half of respondents (43%). By warranty breaches, or their respective regions. This
contrast, an expectation for indemnities given by vendors. is most true for those based
increased distressed M&A has The non-use of RWI presents a in Asia-Pacific (80%), which
been baked into the market major competitive disadvantage has traditionally—other than
since 2021. Last year, 66% of for buyers. in Australia, where RWI has
GPs presciently expected an a very strong following—had
uptick in distressed deals in Without such coverage the least usage compared
anticipation that interest rates in place, vendors may be to other regions, followed
would need to rise, in spite expected to place between by EMEA (77%) and North
of central banks then seeing 5% and 20% of their sale America (64%).
inflation as transitory. Similarly, proceeds in escrow to cover
67% of respondents this year any potential indemnification Rather than an aversion to
expect distressed deal flow claims. Minimizing or nixing RWI coverage, this lower
to become a major trend as this escrow obligation outright expectation in North America
companies struggle with their maximizes liquidity and bumps is a function of the maturity of
financing costs. up vendors’ IRRs. Therefore, this insurance’s adoption in the
those sales that GPs are able to world’s largest PE market. “It’s
Policy protection successfully secure will benefit a phenomenal instrument if you
It is inevitable that amid slowed all the more from RWI policies use it correctly, and you’re now
growth and a tougher exit in an environment where exits seeing that some regions, where
environment, representation are harder to come by and where its adoption has lagged, are
and warranty insurance (RWI), multiple compression may be catching up to how far the US
or warranty and indemnity weighing on expected returns. has pushed it,” says Bolsinger.
insurance as it is known in

13
APAC spotlight
PE dealmaking in APAC took Kam Boon. “Traditionally, the NUMBER OF APAC BUYOUT DEALS, 2017–Q3 2022
a sizable tumble year over country’s taken the lion’s share 1400
year. While a 17% drop in the of deal value. However, people 1200
number of buyouts—to a total have been concerned about the

Number of deals
1000 356
of 707 deals in the first three geopolitical situation in China,
800
quarters—was in line with global the uncertainties around the 340
174
600
figures, the 60% decrease in regulatory policy affecting the 146
160
172 214
400 171 257 228
deal value compared to Q1-Q3 tech sector and the extensive 144 156 168
200 147 135
2021 was far steeper than the lockdowns. There has also 140
150
132
128 128
250 305
106
45% rate of decline globally. been a lot of uncertainty and 0
2017 2018 2019 2020 2021 2022
fluctuations in the public
China traditionally dominates markets in China.” Q1 Q2 Q3 Q4
activity given the size of its
economy, and the country has Another sign of the unique
generated no shortage of macro issues affecting the Chinese
and market developments. In market, the largest PE-related VALUE OF APAC BUYOUT DEALS, 2017–Q3 2022
December of 2021, Evergrande transaction in the country was
350
was officially labeled a defaulter the US$4.7bn investment in
for the first time, the mammoth semiconductor firm Innotron 300 $84.8
$132.9
real estate developer’s Memory by a consortium 250
Value (US$bn)

travails spooking markets and that included some of the 200 $113.3

signaling that not all is well in country’s largest technology 150

$34.9 $26.0
the country. Since then, the firms (Alibaba and Tencent), 100 $52.1 $37.3 $38.9
$42.4 $89.7 $25.7
$28.5
contagion has spread through as well as a group of financial 50 $40.9 $37.5 $26.6
$21.2 $38.7
$34.5
$47.2 $40.4
the property sector, with a investors. The deal comes on 0
$19.0 $30.8 $23.8 $17.1

number of other developers the heels of growing Western 2017 2018 2019 2020 2021 2022
defaulting on their liabilities. protectionism around chip
Q1 Q2 Q3 Q4
technology, which could limit
Months later, as the rest of the Chinese tech companies' access
world was doing its best to put to semiconductor technology
COVID-19 behind it, China owned by Western firms.
reintroduced strict lockdowns
to try and stem flare-ups of Big in Japan of buyouts in the country
the virus in the major seaport As uncertainties cloud the to nearly double from 64 in
city of Shanghai, among other Chinese market, the Japanese 2020 to 124 in 2021—the
locations. This put already market continues to grow in highest annual volume on
strained supply chains back its attractiveness to foreign Mergermarket record (since
under immense pressure. PE. The weakness of the 2006). The first three quarters
Japanese yen compared to the of 2022 have already recorded
“APAC really is the most US dollar, combined with the US$19.9bn combined in
diverse buyout region in the political stability of the country deal value, more than the
world. There’s been a lot of and opportunities presented entirety of 2021, which totaled
happenings in China, which by traditional conglomerates US$16.5bn.
has really skewed the numbers looking to streamline, created
so far this year,” says Siew conditions for the number

14
The top two deals of the group Gojek and online PE BUYOUT VALUE BY SECTOR IN APAC (US$M),
first three quarters of 2022 mall Blibli. This is drawing 2021–Q3 2022
in APAC showcased the interest from global investors
dominance of US-based PE and competition for deals is
$115,136
in Japan, with both involving intensifying in a world in which TMT
KKR. The largest was a tech increasingly underpins $31,810

US$6bn bid for Japanese business activity and growth, in

$40,865
outsourced logistics provider spite of the valuation rout that Industrials & Chemicals
Hitachi Transport System, has been observed this year. $17,487
from conglomerate Hitachi. Encouraged by the success
KKR was also involved in the in these countries, investors Pharma, Medical
$21,548
restructuring of Japanese auto are also looking further afield & Biotech $9,834
parts supplier Marelli Holdings, to the Philippines, Malaysia,
which it already owned, with Vietnam and Thailand. $41,307
the company selecting the firm Transportation
$9,755
as its preferred partner to help “We see that with a lot of
put it on an even keel. the travel restrictions being
$15,258
lifted this year, our clients are Consumer
Southeast Asia shines returning to in-person deal $6,643

Southeast Asia is continuing sourcing and it’s the Southeast

to demonstrate strength Asian region where they’re $32,913
Business Services
amid the pullback in China. going to tap opportunities. $6,195
The subregion has seen its We are also tracking a lot of
manufacturing activity expand interest from funds that have $26,723
Financial Services
as Chinese production has traditionally not invested in $5,937
migrated to other parts of the region in a significant
the continent over the past manner, spending time $3,276
decade, accelerated by the learning about the region with Construction
$4,759
pandemic and China’s zero- a view to making meaningful
COVID approach. investments here,” says Siew
$4,330
Kam Boon. Real Estate
The region’s digitalization $3,642
initiatives, spearheaded by the Among the largest PE
Association of Southeast Asian deals so far this year have Energy, Mining
$18,828

Nations (ASEAN), are also been Blackstone’s US$1.6 & Utilities

$3,337
well aligned with Southeast acquisition of Singapore-based
Asia’s young and tech-savvy engineering firm Interplex $14,269
population. Tech-centric deals and Hong Kong-based PE Leisure
$1,186
dominate in countries like RRJ’s US$1bn acquisition of
Indonesia and Singapore, the Fullerton Health, a Singapore- $534
territory having birthed its based health company which Agriculture
$40
first generation of unicorns operates across Singapore,
including ride-hailing app Malaysia, Indonesia, India and
Grab, multi-service platform Hong Kong. 2021 Q1-Q3 2022
and digital payment technology

15
Fund trends

PE fundraising is up against
some of the strongest
of the COVID-19 pandemic
(e.g., reconfiguration of supply
“There’s a gap between
headwinds it has faced in
recent memory amid declining
chains and softening demand
for office real estate) and
the smaller funds and
equity markets. Once again, economic sanctions imposed the very large funds, of
the denominator effect has by various actors on others,
reared its head: when the value add to these headwinds. which there aren’t that
of public stocks in investor
portfolios contracts, by default All of this is causing LPs many. A lot of LPs are
they become over-allocated to be more selective in the
to PE and other alternative commitments they make to looking to deploy larger
investments, whose fund
valuations lag public markets.
new PE funds, while spurring
high secondary market amounts with fewer
Add to this the less-discussed
numerator effect: LPs leaned
activity as investors seek to
rebalance their portfolios. relationships because
heavily into PE in 2021 and
at market-top valuations,
Renewed caution inevitably
favors marquee PE names with
it’s easier to manage.”
magnifying asset-allocation
skews in the face of recent
extensive experience and the
full gamut of fund offerings.
Sabina Comis, Dechert LLP
stock underperformance. Analysis by S&P Global and
However, it is not just the Preqin revealed that the top 25
denominator and numerator PE firms globally held half of
effects at play this time. The the total unallocated capital in
combination of high interest the PE industry in 2021.
rates and high inflation, not
seen in the US for 40 years “It’s a trend that has been
and in Europe for 30 years, developing over the past few
as well as the residual effects years already,” says "Sabina

16
Comis, a funds and tax WHAT IS THE BIGGEST GLOBAL FUNDRAISING CHALLENGE YOUR FIRM HAS FACED?
partner in Dechert's Paris (SELECT THE MOST IMPORTANT)
practice. “There’s a gap
between the smaller funds Large LPs concentrating their 40%
and the very large funds, of investment relationships to 32%
a smaller number of funds
which there aren’t that many. 20%
A lot of LPs are looking to
15%
deploy larger amounts with Competing against other funds for
LP capital, especially the largest 14%
fewer relationships because and/or more diversified GPs
27%
it’s easier to manage. It’s
becoming a vicious circle in 15%
which smaller managers are Convincing investors their capital
14%
will be put to work quickly
finding it hard to establish the 22%
track records for which LPs
are looking and the gap keeps 15%
The negative market perception
getting wider and wider.” of a slower fundraising process
20%
16%
According to two in five
Asia-Pacific respondents, the LP skepticism surrounding 5%
valuations and health of 17%
single most important global pre-pandemic investments
13%
fundraising challenge to
their firm is that of large LPs 10%
Securing smaller commitments
concentrating their investment (under US$100m) from 3%
relationships with a smaller large institutional investors
2%
number of funds; 32% of
EMEA and 20% of North
America respondents agree
with this. Asia-Pacific EMEA North America

More than a quarter (27%) of

North American respondents
also point to the challenges of
competing against other funds,
particularly large and more fundraising across most private In spite of the headwinds, Q2
diversified GPs, for LP capital. asset classes declined in 2022 2022 saw the largest number
compared to 2021. In addition, of PE funds being raised
According to Pitchbook data, the average timeframe for in the global market at any
US private equity firms raised achieving a final closing of a time over the last five years.
US$258.8bn across 296 funds fund is the longest it has been This has resulted in a very
through Q3 of 2022. Despite over the past years. According congested market and many
this, it is expected that the to Preqin, during H1 2022, LPs inundated with solicitations
year will end on a weaker note, 72% of PE funds took 13 or from the sponsors of those
owing to many LPs having more months to reach a final funds, further complicating
already hit their allocation close, compared to 56%, 50% fundraising efforts.
targets for the year, according and 38% of PE funds in 2021,
to Pitchbook. Globally, 2020 and 2019, respectively.

17
In last year’s survey, become much harder to come investors are becoming more
respondents were far more by amid the tighter monetary conscious of performance
concerned about convincing conditions and the outflux hurdle rates, typically an
investors that their capital of market liquidity, which is 8% IRR over which GPs are
would be put to work quickly. disproportionately affecting rewarded with carried interest.
Valuations were running high deal activity at the top end of
and LPs at the time were the market. This rate is approximately the
understandably questioning yield available on treasuries
potential capital deployment Overcoming hurdles with a similar maturity to
challenges. With the valuation Interest alignment at the the average life of a PE
reset this year, it follows that fund level has now come to partnership—in other words,
GPs with capital should have the fore. For the past decade the return investors could
less trouble finding more or more, GPs and LPs have achieve by simply parking their
conservatively priced deals and had little cause to consider money in government bonds
will therefore be able to deploy interest rates. Now that over the same period. As yields
the capital. This comes with central banks are in hiking are now increasing, it is only
a caveat: debt financing has mode to tame inflation, natural that LPs want to see

OVER THE LAST 12-24 MONTHS, HAS THE LEVEL OF INTEREST IN THE FOLLOWING INCREASED, DECREASED OR STAYED
ABOUT THE SAME?

Partnerships with strategic buyers 86% 11% 3%

2%
Growth equity/structured equity investments 78% 20%

1%
Co-investment and joint ventures
69% 30%
on the part of your LPs

LP desire for greater control over the

54% 37% 9%
direction of portfolio company

Diversification of asset class strategy 47% 30% 23%

Larger/differentiated potential pool of targets 46% 27% 27%

Targeting of minority stake investments 40% 39% 21%

Setting up fund(s) that raise

39% 36% 25%
capital from retail investors

Opportunity for lower-risk investments/

30% 33% 37%
diversification of risk

Increased Stayed about the same Decreased

18
the bar raised for their GPs. Partnering up compared to only 74% who
Across all regions, 53% of In the face of a more said so in last year’s survey.
respondents say that LPs have challenging deal environment,
asked for higher hurdles over respondents say that there The rise in the level of interest
the past 12 months. is more interest in co- in co-investments is even
investments and joint ventures starker. In last year’s survey,
There are competing interests on the part of their LPs, as 45% of respondents said that
at play here that LPs and GPs well as partnerships with their LPs’ level of interest
will have to negotiate carefully. strategic buyers. Almost nine in co-investments and joint
“On the one hand, interest in ten respondents (86%) say ventures had risen in the past
rates are going up, so LPs look that interest in partnerships 12-24 months, compared to
for a higher hurdle rate. On with strategic buyers has risen 69% of those polled in 2022
the other hand, valuations are in the past 12-24 months, who said the same.
down and so fund teams are
asking for the hurdle rate to
go down to trigger their carry.
There’s a tug of war in terms of
alignment of interests here,” WHAT, IF ANY, ACTIONS HAVE BEEN TAKEN (OR CONSIDERED) IN THE PAST 12 MONTHS
says Sabina Comis. “Increasing TO BALANCE INCENTIVIZATION WITH THE ALIGNMENT OF LP INTERESTS IN YOUR FIRM?
the hurdle rate is a big give (SELECT ALL THAT APPLY)
because it makes it harder for
fund managers to earn their
75%
carried interest. In addition, we
are seeing LPs asking for larger LPs have asked for a higher 66%
GP commitment in new funds
GP commitments.”
58%

Respondents acknowledge
that bigger GP commitments 40%
are a key bargaining chip in LPs have asked for hurdle rate
to be increased in light of 69%
realigning the interests of rising interest rates
fund managers with those of 47%
investors. More than half (58%)
of North American respondents
50%
say their LPs have asked for Senior leadership in the GP have
foregone a portion of their carry split
them to put more of their own to attract, retain and incentivize
46%
capital into new funds. Two more junior staff
51%
thirds of EMEA respondents say
the same, while 69% point to
LPs asking for hurdle rates to GPs asked for hurdle rate
40%
be increased. to be lowered to account for
26%
lower valuations and bring
the team back into the carry
42%

Asia-Pacific EMEA North America

19
The retail route decimated fee structures TO WHAT EXTENT DO YOU THINK RETAILIZATION/
One of the most prominent in the asset management DEMOCRATIZATION OF PRIVATE EQUITY WILL HAVE
watch words in PE is industry. Could it be that a A NEGATIVE IMPACT ON RETURNS?
“retailization.” Retail investors similar story is on the cusp
continue to look for ways of unfolding across PE?
to beat public markets and “As the large, traditional 8%
have limited opportunities for managers continue to push A significant extent
direct exposure to PE funds’ into alternatives and the 32%
outperformance. There are PE industry targets retail A slight to
moderate extent
numerous constraints on retail investors, will the convergence
It will not have any
investors investing in PE. also extend to fee structures? negative impact
Regulations preclude all but We’ve seen this before,” says
“sophisticated” high-net-worth Christopher Field, co-head 60%
and institutional investors of Dechert’s PE practice and
from participating in PE London corporate group.
funds. Then there are the high “People don’t know exactly
minimum commitments that what that will look like, but
GPs require for entry into their it’s coming.”
funds, combined with long-
term illiquidity constraints and
the opacity that comes with
periodic valuations.

Opening up access to PE
will make more capital
available to GPs. That should “As the large, traditional
be good news. However,
there is potential for this to managers continue to push
weigh on the asset class’s
performance as it increases into alternatives and the PE
deal competition. A third of
respondents believe that this industry targets retail investors,
democratization of PE will
have a significantly negative will the convergence also
impact on returns, with a
further 60% believing the extend to fee structures?”
impact will be slightly to
moderately negative. Christopher Field, Dechert LLP
Another consideration is what
retailization will mean for PE’s
traditional 2% management
fees. The inexorable rise
of index investing over the
past several decades has

20
Private credit seniority compared with higher- IN THE PAST THREE YEARS, HOW HAS YOUR
Private credit is continuing risk equity. FIRM’S USE OF PRIVATE CREDIT FINANCING IN
to enjoy the spotlight. Global BUYOUTS CHANGED, IF AT ALL? (SELECT ONE)
stores of dry powder in private Whatever the motivation for
credit funds climbed by more LPs topping up these funds’ 2%
than 13% over the 12 months coffers, PE managers are We have increased
to the end of Q2 this year, from enthusiastically seizing on the our use of private
credit
US$364bn to US$413bn, availability of deal financing
Preqin data show. Despite the from these private sources, as 47% 51%
Stayed about
the same
fractures showing in high- banks struggle to offload buyout
yield bond markets this year loans and high-yield bond Decreased our use
and investors flocking from market activity suffers paralysis.
leveraged credit as they pivot The proportion of respondents
toward less risky assets, LPs who report increasing their
are still drawn to private credit use of private credit over the
as a strategy. Unsurprisingly, past year has risen for all three
there currently appears to be regional groups, particularly use private credit more than
a tilt toward distressed debt. for those based in APAC, from traditional bank financing for
For example, one of the largest 40% in 2021 to 65% in 2022. their buyout deals, compared
funds that closed in H1 was Well over half (58%) of North with 52% of EMEA respondents
Ares Special Opportunities American respondents say the and 42% of North America
Fund II at US$6bn. However, same, and across all regions respondents who report using
senior credit funds are still 51% disclose their use of direct private credit and traditional
being raised, such as Crescent lending is up, an increase on bank financing in roughly equal
Direct Lending III, which also last year’s 45% who said the measures to back their deals.
amassed US$6bn. same. This is a massive step up from
last year, when 35% of APAC
It is estimated that, despite Banks have consistently lost GPs said they were primarily
the macro and debt market market share to credit funds tapping credit funds to bankroll
turbulence, private credit over the past decade, first in the their deals.
fundraising has a chance US and then in Europe, with the
of coming a close second trend now playing out in APAC. The move away from banks
to 2021’s record-breaking Equity sponsors appreciate is seen across the board, too,
fundraising performance. the certainty of execution that and has been a consistent
The first half of 2022 saw comes with dealing with a single theme over the last ten to 15
US$93bn collected globally, creditor rather than banking years. Last year, 26% of GPs
versus US$213.7bn across the syndicates and the various across geographies were still
entirety of 2021. It appears counterparties once that debt using traditional sources of
that LPs are being drawn to the is sold down in the secondary debt, a proportion that has
relative safety of the strategy, market. since fallen to as little as 13%.
which benefits from floating There is certainly no shortage
rate exposure amid monetary We find that 60% of Asia- of advantages available to PE
tightening, as well as capital Pacific respondents now

21
funds opting for non-traditional DOES YOUR FIRM USE PRIVATE CREDIT OR TRADITIONAL BANK FINANCING MORE OFTEN
debt. Over the past year, the IN ITS BUYOUT DEALS?
relative importance of those
benefits has shifted. Asia-Pacific 60% 20% 20%

A year ago, GPs were mainly

taking on private credit due
to the certainty of securing EMEA 34% 52% 14%
this type of financing, as
cited by 26% of respondents.
This has now fallen to 19%,
North America 49% 42% 9%
and the greater flexibility of
private credit terms including
financial covenants has Private credit Roughly equal amounts of both Traditional bank financing

taken precedence, with 30%

highlighting this as the reason
to take this route. This is more
than double the proportion IN YOUR OPINION, WHAT IS THE GREATEST ADVANTAGE OF USING PRIVATE CREDIT AS
of PE executives who said COMPARED TO TRADITIONAL BANK FINANCING CURRENTLY?
the same last year (14%).
This is a clear signal that
Greater flexibility on financing
sentiment has changed in the terms (including financial covenants)
30%
more challenging economic
environment. During times
of economic stress, PE funds Higher leverage levels provided 21%
are far more likely to turn
their attention to downside
risk and the potential for 19%
Greater predictability with private credit
earnings erosion to trip
covenants that may cause
painful restructurings and Easier process in scenarios where the 12%
cost them part or all of their portfolio company is not performing to plan
equity positions. As part of
this, there is likely to be an
Follow-on financing commitments 9%
even greater focus on who the
credit counterparties will be—
counterparties with whom they
may need to negotiate if things Speed of execution 9%
turn south.

22
IN THE PAST THREE YEARS, HOW HAS YOUR IN YOUR OPINION, WHAT IS THE GREATEST ADVANTAGE OF USING
FIRM’S USE OF SUBSCRIPTION/NAV FINANCING SUBSCRIPTION/NAV FINANCING FACILITIES? (SELECT ONE)
CHANGED, IF AT ALL? (SELECT ONE)
Improves fund liquidity for
chosen purposes (add-ons, 36%
investor dividends, etc.)
2%
We have increased
our use of Maximizes internal 31%
subscription/ rates of return for LPs
38% NAV financing

Stayed about
the same Less onerous for LPs as 18%
drawdowns are less frequent
60% Decreased our use

Improved speed/ 15%

deal execution

Facilitating flexibility with each buyout, which is and/or subscription lines, it

NAV facilities and subscription especially important in a follows that as many as 38% of
line facilities are other competitive sales process when respondents say their firms have
increasingly popular uses of time is of the essence. increased their use of this type
credit across the PE industry. of financing over the past three
These loans, backed by the Over a third of respondents years, 60% have maintained
net asset value of the fund’s (36%) believe that improvement their use and practically no GPs
assets and the creditworthiness to fund liquidity for chosen (2%) say they have backed off
of LPs, respectively, offer a lot purposes is the top advantage of from using these loans.
of flexibility to sponsors. NAV using NAV facilities. One of the
facilities provide PE funds with upshots of using subscription
readily available liquidity to lines to finance deals before
support their portfolio companies drawing down capital from LPs
with critical investments into is that it can juice up IRRs,
their operations and to help by reducing the length of time
finance bolt-ons. They can that investors’ capital is put
also be used to cover GPs’ to work. The GPs we surveyed
commitments to their own funds agree with this notion—a third
and to fund distributions to see the maximization of IRRs as
investors ahead of exits. the biggest advantage of using
subscription lines.
Subscription lines, meanwhile,
mitigate the immediate need for Given the wealth of benefits that
LP capital calls in connection come with tapping NAV facilities

23
North America spotlight
Like other regions, North The transaction is a significant NUMBER OF NORTH AMERICA BUYOUT DEALS,
America’s buyout market step down from last year’s 2016–Q3 2021
shifted down a gear in 2022. standout buyout, in which
The number of transactions a consortium featuring 3,500
declined by 15% while their Blackstone, Carlyle and 3,000
656
aggregate value sunk by Hellman & Friedman paid

Number of deals
2,500
43% from the Q1-Q3 period US$34bn for Medline, the 2,000 768
452
in 2021 compared to the club deal being the largest 1,500 412 326 547 722
equivalent period in 2022. of its kind since the heady 1,000
384
364 387
837
354 411
days leading up to the global 376 408 438 271
500 841 907
Yet, the outlier nature of financial crisis more than a 324 412 395 420
0
2021 must be kept in mind. decade prior. 2017 2018 2019 2020 2021 2022
The 2,081 buyouts worth
US$333.4bn in the first three Nevertheless, the Citrix deal Q1 Q2 Q3 Q4
quarters of this year are already still accounted for almost
above the value and volume 10% of the total value of all
total in any full-year period in TMT sector buyout activity VALUE OF NORTH AMERICA BUYOUT DEALS,
the decade before 2021. in the first three quarters of 2016–Q3 2021
2017 2018 2019 2020 2021 2022
2022 across North America.
800
The largest buyout in the TMT remains the region’s
region so far this year saw dominant buyout sector by far $148.8
Vista Equity Partners and and technology is arguably 600
Evergreen Coast Capital one of the US’s greatest
Value (US$bn)

$183.1
Corporation acquire Citrix economic strengths. The top
for US$16.6bn in a go- six largest deals of 2022 to 400

private deal. Citrix is a cloud date—Citrix, Nielsen, Zendesk, $214.2 $72.6

$70.6
computing company that Anaplan, Avalara, SailPoint 200 $49.3 $57.8 $115.5 $100.1
$71.3
provides server, application Technologies—all belong to the $50.2 $50.4
$79.2
$72.4 $88.9 $188.2
and desktop virtualization sector. Vista and Thoma Bravo, $76.7 $22.7 $160.8
$43.7 $63.5 $57.4 $58.8
and networking software- both tech buyout specialists, 0
2017 2018 2019 2020 2021 2022
as-a-service. Under the were involved in two each.
deal, it is being combined Q1 Q2 Q3 Q4

with existing Vista portfolio Within technology, software-

company TIBCO, a data as-a-service (SaaS) is
analytics business that helps
its customers predict business
demonstrating particular
appeal. In addition to the Citrix
“Multiples had gone up
outcomes. The combined
enterprise is expected to
transaction, another notable
example of a business-to-
significantly over the
benefit from the digitalization
trend and shift to hybrid
business (B2B) software take-
private this year saw Hellman
last two or three years
working, combining real-
time analytics with digital
& Friedman, Permira, the Abu
Dhabi Investment Authority,
and we’re now seeing a
workspace functionality in and GIC front a US$10.4billon contraction.”
one product. offer for Zendesk. Zendesk
is a SaaS customer support Markus Bolsinger, Dechert LLP

24
and sales business and one at higher interest rates puts PE BUYOUT VALUE BY SECTOR IN NORTH AMERICA
of many to benefit from additional pressure on prices (US$M), 2021–Q3 2022
companies digitalizing their buyers are willing to pay.” And
operations to gain efficiencies, the greater the speculation, or $297,825
productivity and growth. further out those cash flows TMT
$174,716
are projected, the deeper that
Despite PE continuing to valuations become discounted $90,158
capitalize on this secular on a time-weighted basis. Industrials & Chemicals
$42,750
trend, it is doubtful that last
year’s breathtaking deal market What the deal data show, Pharma, Medical $94,954
performance, underpinned by however, is that the number & Biotech $36,870
TMT, will be repeated on an of transactions has remained
aggregate value basis. This is surprisingly robust. Less $56,954
Financial Services
not a simple function of the capital is being put to work, $18,001
wider deal market slowing— that much is certain, but GPs
$4,366
technology valuations in so far this year have remained Construction
$11,900
particular have come under highly active on smaller
added pressure since inflation transactions—at least for the $40,674
became entrenched and the time being. “There is always Consumer
$9,729
Fed set about tightening rates something going on in the
at pace. middle-market, whether it is $49,244
Business Services
new platform deals or add- $9,715
Markets are inherently forward- on acquisitions. Even though
looking. Investors in the tech the amount of capital being Energy, Mining $21,718
space value these companies invested has fallen, private & Utilities $9,555
based on their projected cash equity has really demonstrated
$27,012
flows. As interest rates rise, its resilience,” adds Bolsinger. Transportation
expected future cash flows $7,817

have to be discounted more

$33,401
heavily to account for the Real Estate
$6,408
increased return from passively
depositing money. $16,155
Leisure
$3,753
“Multiples had gone up
significantly over the last $459
Defense
two or three years and we’re $1,960
now seeing a contraction,
especially in certain pockets $0
Government
and sectors,” says Markus $147
Bolsinger. “Rates are
$1,352
significantly higher than they Agriculture
were a year ago, so discounting $126

cash flows at that rate brings

valuations down. In addition, 2021 Q1-Q3 2022
reduced availability of leverage

25
Creative approaches

Today’s challenging deal

environment calls for more
certain performance metrics and
other features coming back in
“Strategic buyers are
creativity on the part of PE
fund managers, both as it
more standard buyouts that had
not been used for a few years.”
partnering with financial
applies to their deals and
the kinds of fund strategies Another smart approach is to
sponsors for a variety
they pursue. For example, source off-market transactions, of reasons, including
with valuation gaps between circumventing the need to
hopeful sellers and scrutinous participate in auctions. This to benefit from their
buyers running wide, earn- may become more necessary
outs have once again become as today’s buyer’s market deal sourcing and
a way to bridge that distance. progresses and PE funds
Earn-outs have become notably begin ramping up their capital creative deal execution
more popular over the past
year, being employed by 57%
deployment to take advantage
of attractive EBITDA multiples. expertise.”
of respondents now compared Almost seven in ten (68%)
with just 27% in 2021. respondents say that they Siew Kam Boon, Dechert LLP
are creatively sourcing deals
“Earn-outs have typically such as from incubators and
been more common in high- executive training camps to
growth company situations help ensure they stay ahead of
where valuations had become the competition. Additionally,
stretched for years and therefore 60% say they are leveraging
these arrangements gave buyers networks to source proprietary
and sellers more confidence deals for the same purpose.
to transact,” says Markus
Bolsinger. “We’re now seeing Partnering up with co-investors
seller notes that are tied to is another way in which GPs

26
IN THE CURRENT ENVIRONMENT, WHAT STRATEGIES DOES YOUR FIRM EMPLOY TO ENSURE IT STAYS AHEAD OF THE
COMPETITION? (SELECT ALL THAT APPLY)

Creatively sourcing deals (e.g., incubators,

executive training camps, teams on 68%
the ground in fertile start-up regions)

Leveraging network to source proprietary deals 60%

Utilizing earn-outs 57%

Locking in a good deal early (particularly in connection

with convertible debt and minority investments) 53%
and negotiating rights to double down
(e.g., super preemptive rights)

Investing in structured equity transactions,

50%
including minority investments

Separate, dedicated pool of capital for opportunistic deals 45%

Differentiated investment thesis instead of

41%
a strategy/sector agnostic approach

are thinking smart in their reasons, including to benefit that can be applied to
dealmaking right now. Three from their deal sourcing upscaling the target company.
quarters of firms say they and creative deal execution There is also the added benefit
are very likely to consider expertise. Increasingly, of a possible exit route if the
partnerships with strategic strategic buyers are teaming co-investor asks for the right of
buyers and there is increasing up with financial sponsors for first refusal on later acquiring
incentive for corporates to a variety of regulatory reasons, the company in question.
seek these arrangements as including antitrust and foreign
competition authorities bear direct investment restrictions,” A further 57% of GPs say
down on mergers. says Siew Kam Boon. These they are currently very likely
arrangements are symbiotic, to consider a club deal with
“Strategic buyers are with sponsors gaining equal one or more of their PE peers.
partnering with financial benefit from the strategic and These kinds of partnerships
sponsors for a variety of market knowhow of a corporate have the advantage of

27
spreading investors’ equity HOW LIKELY IS YOUR FIRM TO CONSIDER THE FOLLOWING DEAL TYPES AT PRESENT?
risk by reducing their exposure
to any one deal, which is 1%
especially pertinent in light Partnerships with strategic buyers 75% 24%
of today’s macro challenges.
Accordingly, enthusiasm for 2%

these types of partnership Club deals 57% 15% 11% 15%

deals has jumped significantly
1%
from last year, when only
GP-led secondary/continuation fund 50% 33% 9% 7%
41% of respondents said they
were very likely to consider 1%
partnerships with strategic Carve-out of orphan/non-core
45% 29% 16% 9%
divisions from corporate sellers
buyers and 32% said they
were very likely to consider 1%
Investment in structured equity/
club deals. Club deals are salvation capital structures
45% 43% 4% 7%
also useful for GPs looking
to make more meaningful
Distressed deals 44% 35% 15% 6%
investments in jurisdictions
with which they may be less
familiar. Partnering with a Vertical integration with a portfolio 39% 39% 9% 13%
more experienced investor can company rather than horizontal
help PE managers learn about
new regions. Reinvestment opportunities 35% 34% 10% 21%

Unexpectedly, take-privates are

Combining a portfolio company with
the least favored deal choice, another firm’s portfolio company
32% 37% 19% 12%

with over half of respondents 2%

saying they are either not very
Private investment in public equity (PIPE) 29% 47% 12% 10%
likely to consider a public-to-
private as an option (26%), 4%
or reservedly saying it would Leveraged recapitalizations 18% 37% 13% 28%
depend entirely on the specific
deal (26%). Some of the 3%
Trading vintage, successful portfolio
largest buyouts in 2022 have companies to successor funds 17% 29% 21% 30%
(with the appropriate approvals)
involved publicly listed targets, 3%
such as Atlantia and Citrix.
Take privates 13% 32% 26% 26%
However, these deals are not
for everyone. US publicly
traded companies have grown
larger in value and smaller Very likely – this deal type is appealing in the current environment
in number over the decades. Somewhat likely – we’re open to the idea Depends entirely on the particular deal
A paper published on the Not very likely – this deal type doesn’t work for our model or is unappealing Unclear at present
Harvard Law School Forum on

28
Corporate Governance found WHICH OF THE FOLLOWING ASSET CLASSES IS YOUR FIRM CONSIDERING INVESTING IN
that, as of early 2017, the OVER THE NEXT 24 MONTHS? (SELECT ALL THAT APPLY)
average market capitalization
of a US-listed company was
Private debt/direct lending 82%
US$7.3billon, the median
being US$832m. For all but Venture capital 76%
the largest fund managers, Distressed debt 63%
this puts swathes of the stock
market off-limits for PE firms Impact investing 62%
managing diversified fund ESG fund 58%
portfolios. Therefore, although
valuations have come down off Hedge fund 52%
their 2021 highs, making take- Structured equity/tactical opportunities 48%
privates more attractive, this
Specialized or niche segment (e.g.,
activity will be concentrated establishing a Life Sciences division)
46%

among the larger sponsors in a Infrastructure 37%

case of value over volume.
Commercial real estate 25%

Creative fund strategies Real assets (e.g., metals & mining, 17%
farmland, water)
Liquidity is top of mind for
Residential real estate 16%
GPs and their LPs right now.
With exits harder to come by Cryptocurrencies 13%
in 2022, fund managers are
thinking creatively about how
to return capital to investors.
who said they were likely to been confirmed by sponsors
“We’re witnessing an increase pursue this last year to 46% relying so heavily on private
in GP-led secondaries and who now see this as a likely credit in recent months. GPs
fund financing,” says Sabina possibility moving forward— are well aware of the secular
Comis. “These strategies, and as little as 17% seeing shift toward financing deals
including continuation funds, this as very likely. with private loans and want in
allow GPs to keep a hold of on the action. Adding venture
quality assets without having When asked about the asset capital to the asset class mix
to offer them up to the world classes that respondent firms was not far behind, with 76%
at large as an exit, only to are considering investing in of GPs weighing early-stage
return capital to investors.” over the next 24 months, strategies, and distressed debt
private debt is the clear taking third place with 63%
There has been a notable winner. As much as 82% of thinking about taking advantage
drop-off in the proportion PE firms report that they are of credit market dislocations
of respondents considering weighing up adding direct and business insolvencies with
trading vintage, successful lending to their strategy over loan-to-own strategies.
portfolio companies to the next two years, a course
successor funds, from 70% of action that is likely to have

29
GP-stake divestiture
strategies
Our research shows that as
many as 63% of PE firms are
“LPs are asking
In January of 2022, MBK
Partners, a North Asia-focused
planning to make a GP-stake
divestiture in the next 24
for increased GP
PE firm founded by billionaire
Michael Kim, sold a 13%
months. Of these, 59% say
the proceeds will go toward
commitments and/or,
stake to Dyal Capital Partners. GP commitments for the next in certain jurisdictions,
It joined a growing list of GPs fund. The same proportion
turning to a more permanent say it will go toward vertical larger carried interest
means of raising cash by investment, while 54% say
divesting a piece of their PE that fueling growth is one of subscriptions.
firms to specialist investors. It the motivations for seeking
is expected that MBK will use such a deal. Interestingly, GP stakes
the proceeds to move beyond
its core buyout and special A smaller proportion (32%) can also allow GPs
situations strategy into real
estate and growth capital to
point to founder liquidity as
being the reason for selling a to secure a portion of
expand its deal options. piece of the PE business. In
Europe, there are strong signs
their next fundraising
Dyal, a subsidiary of Blue Owl
Capital, is one of a select few
of an increase in this activity.
In August, it was reported that
by having the GP-stake
firms, alongside Blackstone,
Aberdeen Standard
Dyal was in discussions with
PAI Partners, one of France’s
buyer commit to invest,
Investments and Goldman
Sachs’ Petershill funds, that
most well-established PE firms,
for a potential minority stake in
as an LP, in one or more
currently target GP stakes. the firm. of their next funds.”
The purpose of these cash
raises is manifold. In some “Several strategies are actually Sabina Comis, Dechert LLP
cases, it is secondary capital at play here. The first one is
that goes directly to the firm’s often related to the fact that
partners, allowing them to there is a change of generation
cash out of the business to that is playing out now in
bridge succession events as continental Europe among
younger blood moves up the successful PE houses,” says
ranks to run the business Sabina Comis. “In addition,
and founders depart. In other LPs are asking for increased
cases, such as MBK, the GP commitments and/or, in
proceeds are primary capital certain jurisdictions, larger
that is invested directly into carried interest subscriptions,
the business for expansion or in order to spread the carry
to cover GPs’ commitments to more widely amongst the team
their own funds. members. Interestingly, GP
stakes can also allow GPs to

30
IS YOUR FIRM PLANNING TO MAKE A GP-STAKE IF YOU ARE PLANNING A GP-STAKE DIVESTITURE, WHAT WILL THE
DIVESTITURE IN THE NEXT 24 MONTHS? PROCEEDS GO TOWARD? (SELECT ALL THAT APPLY)
(SELECT ONE)

GP commitments 59%
for the next fund
Yes

37% No Vertical investment 59%

63%
Fuel growth 54%

Founder liquidity 32%

secure a portion of their next in 2021, more than double

fundraising by having the GP- the traditional expectation
stake buyer commit to invest, of 1% to 2% in times past.
as an LP, in one or more of Typically, GPs would cover this
their next funds. From the GP commitment using the carried
stake buyer’s viewpoint, this interest proceeds from their
can also be a means to make predecessor funds. However,
a strategic move into a given in the current exit-constrained
sector in a given jurisdiction environment and with the
where they have no real standard GP commitment
footprint yet. There is no doubt increasing, strategic
that this market will increase divestitures are becoming
significantly in the next few a smart solution to PE fund
years in Europe.” managers’ liquidity needs.

The need for liquidity to cover

GP commitments comes at a
time when LPs are expecting
their fund managers to front
more of their own capital in
their funds. According to a
survey by Investec published
this year, the average GP
commitment reached 4.8%

31
Buy & build tech-enabled platforms, GPs add-on plays rather than
Buy-and-builds could are also teaming up with GPs having to rely on volatile
backstop weakened buyout industry players to pursue credit markets for landmark
activity over the coming buy-and-build strategies to platform acquisitions.
months. With debt financing create a mega tech-enabled
harder to come by, large platform to immediately When it comes to planning
platform deals will be harder compete with other platforms their buy-and-build strategies,
to execute, potentially or bridge existing market gaps. respondents based in EMEA
encouraging funds to turn were most likely to say they
their attention to picking Naturally, combining concentrated on building up
off smaller synergistic plays companies is not without a platform company around
that can help their existing its challenges. The most a core technology (57%),
portfolio companies to achieve commonly cited of these is while those based in North
inorganic growth amid an formulating the appropriate America and Asia-Pacific
economic slump. strategy to achieve synergies appear to be more likely to
and growth for the enlarged pursue a strategy of building
There are other reasons for PE company. This selection a portfolio of complementary
to pursue this approach in the is particularly top-of-mind or synergistic products (57%
current climate. Successfully among North American and 60%, respectively). These
executing bolt-ons and respondents (58%), as is the are not mutually exclusive, of
realizing synergies typically challenge of integrating add- course. Acquiring a company
not only accrues to EBITDA ons effectively once the deal with complementary products
but earnings margins too, as has closed. can be a crucial step toward
superfluous costs are cut out building a market leader in
of the combined business. EMEA respondents take a nascent sector, and a core
Buy-and-builds have also a different view. For 61% technology could be the star
long been sold as a shrewd of this cohort, the biggest product in a target company’s
multiple arbitrage play. With challenge is raising enough product portfolio. Whatever
less competition toward the capital (including debt) at the the motivation for pursuing
lower-cap end of deal markets, platform company to make an add-on or multiple follow-
sponsors typically pay lower add-on purchases. This is ons, GPs must have a clear
EBITDA multiples on these where fund-level financing strategic rationale before
deals. This has never been may come in useful. As taking the plunge.
more relevant following a touched on earlier in this
feverishly active period for report, fund NAV facilities
PE in 2021, when valuations have various liquidity-boosting
were running hot. By buying benefits as they can be used
and building, GPs have the for numerous purposes. It is
potential to average down possible that these facilities,
the EBITDA multiple they which can be drawn just like
have paid on assets. With the revolving credit lines, may
success stories surrounding be tapped to finance smaller

32
WHAT ARE THE BIGGEST CHALLENGES YOUR FIRM FACES WHEN MAKING ADD-ON ACQUISITIONS FOR A
PLATFORM COMPANY? (SELECT TOP THREE)

Formulating a strategy to achieve synergies and 46%

52%
growth for the enlarged company 58%
46%
Integrating the add-on acquisitions effectively 40%
58%

Identifying a sufficient number of suitable 46%

46%
add-on targets during the hold period 40%

Generating and/or raising enough capital (including debt) 35%

61%
at the platform company to make add-on purchases 35%

Gaining buy-in from management 46%

37%
teams at the acquired companies 47%

Upgrading existing management team to 45%

32%
deal with larger and more complex footprint 35%
36%
Increased antitrust scrutiny 32%
27%

Asia-Pacific EMEA North America

WHICH BUY-AND-BUILD STRATEGIES DO YOU CURRENTLY USE MOST OFTEN?

(SELECT TOP TWO)

60%
Acquiring synergistic/complementary products 46%
57%

50%
Building up a platform company around a core technology 57%
52%

45%
Building a dominant player in an emerging sector 54%
38%

35%
Regional consolidation (e.g., acquiring similar
20%
businesses located in one specific region)
31%

10%
Regional diversification (e.g., combining similar
23%
businesses located in different regions)
22%

Asia-Pacific EMEA North America

33
Carve-outs Private sector debt levels IN THE NEXT 12-18 MONTHS, WHAT DO YOU
A recent report by the fell for the first time in eight EXPECT TO HAPPEN TO THE NUMBER OF CARVE-
American Investment Council years between 2021 and OUTS TARGETED BY YOUR FIRM? (SELECT ONE)
found that PE firms invested 2022, albeit minimally. The
over US$119bn to carve out Janus Henderson Corporate
nearly 600 business units Debt Index shows that global 2%
Increase
last year, setting them up to corporate net debt has fallen
forge futures as independent by 0.2% and that 51% of 28% Stay about the same
companies under PE companies have managed to Decrease
ownership. This was a 52% reduce their indebtedness,
increase over 2020. which now stands at
US$8.15tn. Debt levels are 70%
Regionally, 76%, 70%, and still excruciatingly high—but
63% of those based in North may have topped out.
America, APAC and EMEA,
respectively, expect to pursue Antitrust issues
more of these corporate spin- Less than one percent (<1%)
offs, compared with 58%, of the approximately 4,130
40%, and 40% of respondents HSR merger filings made in three are known for favoring
from these regions who said 2021 required or resulted in a tougher stance on merger
the same in 2021. divestitures in the US as of control and antitrust. Notably,
the end of the third quarter these officials have expressed
Even with today’s various of 2022.  Still, 40% of North strong concerns against certain
dealmaking challenges, carve- American respondents see acquisitions by PE firms. AAG
out activity will likely be a corporate divestitures as Kanter has stated that roll-up
major focal point for fund being primarily driven by the acquisitions by PE firms in an
managers over the next 12-18 requirements of regulatory industry is a “business model
months. Indeed, seven out of authorities, including merger [that] is very much at odds
ten respondents expect the control. with the law and very much
number of carve-outs they target at odds with the competition
to increase over this period, That view might in part we’re trying to protect.”
compared to 48% who said the be based on the Biden
same in last year's survey. administration assembling a Similarly, FTC Chairwoman
noteworthy team of antitrust Khan has stated that a PE
Opinions on what will drive specialists that includes Lina firm’s business model “may
this activity have also shifted Khan, chairwoman of the distort ordinary incentives
over the past 12 months. The Federal Trade Commission; in ways that strip productive
need for corporates to pay Jonathan Kanter, head of capacity and may facilitate
down excessive debt loads the Department of Justice’s unfair methods of competition
was considered the primary Antitrust Division; and Tim and consumer protection
motivator for carve-outs a year Wu, the White House official violations.” FTC Chairwoman
ago, cited by 29%. That has responsible for Technology Khan has also stated that
since fallen to 18%. and Competition policy. All new DOJ and FTC Merger

34
Guidelines, which are currently IN YOUR OPINION, WHAT IS THE MOST IMPORTANT CURRENT DRIVER OF CARVE-OUT
being drafted, will address ACTIVITY? (SELECT ONE)
“roll-up play by private equity
firms.” Going forward, PE Divestitures required by merger 10%
firms need to be aware that control or foreign investment 23%
regulatory authorities
their acquisitions may face 40%

increased antitrust scrutiny, 30%

especially if a PE firm is in the PE firms carving out units 29%
process of acquiring multiple of portfolio companies 20%
companies in the same sector.
15%
Corporates selling business
Foreign direct investment units to pay down debt
23%

(FDI) 15%

In addition to stepped up 30%

antitrust enforcement and Corporates rationalizing non-core
17%
business units to hone strategies
concerns, add to this foreign 7%
investment scrutiny. In
15%
September, President Biden
Corporates shoring up liquidity 8%
issued an executive order titled
18%
“Ensuring Robust Consideration
of Evolving National Security
Asia-Pacific EMEA North America
Risks by the Committee on
Foreign Investment in the
United States,” in response to
rising national security threats. that could be de-anonymized. contribute to PE deal flow,
These priority focus areas as corporates’ pain becomes
The order calls on the are not new to CFIUS; it is PE’s gain. That said, the new
Committee on Foreign notable, however, that the foreign subsidies regime on
Investment in the United States Biden Administration thought which the EU has recently
(CFIUS), which has already it necessary to signal the reached political agreement
become more hawkish over marketplace more broadly may also raise issues for PE.
the past five years, namely by issuing public guidance Under the new regime the
against Chinese investments, to of this sort, and by using an European Commission is
consider certain factors when executive order (rather than empowered to investigate deals
reviewing deals. These include an agency guidance) as the that have an EU nexus and
transactions that may impinge means to deliver the message. involve a financial contribution
on supply chain resilience or Both the European Union (EU) from a non-EU government—
the US’s technology leadership, and the United Kingdom have which would include a
incremental investments that also strengthened their foreign sovereign wealth fund—in
may facilitate a technology investment regimes. excess of €50m.
transfer, any associated
cybersecurity risks, and risks More blocked deals and forced
to US citizens’ sensitive data strategic divestments will only

35
EMEA spotlight
The number of EMEA buyouts private real estate transaction NUMBER OF EMEA BUYOUT DEALS, 2017–Q3 2022
fell by 22% from the first on record.
three quarters of 2021 to the 3,000
equivalent period this year—a Blackstone’s precedent-setting 643
2,500
steeper rate of decrease than plays aside, deals in the region

Number of deals
global activity. However, the have understandably been 2,000 786

rate of decline in value (37%) more modestly sized recently. 1,500 410 431 424 589
418

was lower than the overall drop The next two largest deals saw 1,000 410 414 440
783 656
411
globally, with activity in the KKR pay US$5.8bn for British 417 448 404
500 278
region being dominated by two power generation company 352 374 374 365
735 727

large transactions, the buyouts ContourGlobal and US$5.5bn 0

2017 2018 2019 2020 2021 2022
of Atlantia and Mileway. for Dutch soft drink maker
Refresco. No other buyout Q1 Q2 Q3 Q4
Atlantia is Italy’s largest airport in EMEA was valued above
and motorway operator and was US$5bn in the first three
taken over by Blackstone and quarters of 2022.
the Benetton family holding VALUE OF EMEA BUYOUT DEALS, 2017–Q3 2022
2017 2018 2019 2020 2021 2022
company Edizione, which Investors have spent 2022
already owned a third of the rotating out of higher-risk assets 500
business, in a deal valued at and seeking refuge for their $89.1
US$46.4bn. As Atlantia is a capital—a task that has proven 400
critical infrastructure operator, challenging as even government $122.1
Value (US$bn)

the Italian government had bonds have lost their allure 300
special veto powers over the amid surging inflation
$29.1
transaction, but the Italian and widespread monetary 200 $41.9 $69.7 $151.2
market watchdog cleared the tightening. High-yield buyout $45.7 $50.1
$43.4
$129.0
$36.9 $53.0
deal in early October, resulting debt has been off the menu, 100 $47.3
$69.7 $70.0 $36.7
in the largest take-private ever causing large-cap deals to be $50.9 $117.4
$86.2
$64.7
made on European soil. put on hold as investors digest 0
$26.8 $44.7 $38.9
2017 2018 2019 2020 2021 2022
the macro outlook and await
Mileway, meanwhile, was more healthy EBITDA multiples Q1 Q2 Q3 Q4
sold between two Blackstone and leverage ratios.
funds in a transaction worth
US$23.8bn. The company This has inevitably skewed
owns the largest last-mile PE activity toward mid- and
portfolio in Europe and the small-cap deals, which are not regions, as seen by deal value
recapitalization saw Blackstone subject to the caprice of the falling far more sharply than
real estate investors realize high-yield bond and syndicated deal volume.
value while investors in the loan markets. Instead, smaller
firm’s long-hold Core+ strategy managers benefit from tapping Tensions rising
gained long-term exposure bilateral loans from local The ongoing war in Ukraine
to one of the firm’s highest relationship banks and direct has been a cloud hanging
conviction themes: logistics. lending funds. This debt over Europe for much of this
The deal was another record- financing gap has been shaping year. Energy prices have been
breaker, being the largest PE activity in 2022 across spiraling due to the disruption

36
of liquid natural gas supplies, has implications for PE and its PE BUYOUT VALUE BY SECTOR IN EMEA (US$M),
massively increasing businesses’ investors. For one, LPs need to 2021–Q3 2022
input costs. These externalities think carefully about whether
appear to be putting a damper they are sufficiently diversified $85,932
on deal appetite as investors across their PE portfolio to TMT
$59,538
scan the horizon for risks that mitigate against currency risk, or
could impact their assets. whether hedging facilities need $889
to be put in place. It should Transportation
$48,888
The Baltic region continues to also see US PE houses go on
be the hardest hit by inflation. the offensive, putting dollar- $73,646
Industrials & Chemicals
Estonia is experiencing the denominated buyout funds to $27,932
highest rate of price rises in the work in Europe as they get more
eurozone, almost quadrupling bang for their buck. $11,789
Real Estate
from 6.4% in September 2021 $26,374
to 24.2% a year later. It is a “There’s a strong possibility
Energy, Mining $30,429
similar story in other parts of that we’ll see a wave of take- & Utilities $19,620
Eastern Europe, although on the privates by US acquirers buying
farthest side of the continent businesses that are exposed to $43,412
Pharma, Medical
the Netherlands had the biggest headwinds or have fallen out of & Biotech
$16,524
monthly increase in prices favor with investors, where they
between August and September can pick those up in the local $41,117
Consumer
in 2022, with inflation soaring currency,” says Field. “Then, in $13,128
from 13.7% to 17.1%. And the UK, you have the multiple
this is before the colder seasons changes in government. The $32,624
Business Services
when energy demand surges. Truss administration initially $10,883
“The Ukraine-impacted energy attempted an unfunded
$25,941
crisis looms large and has yet lowering of taxation in a highly Financial Services
to fully manifest itself,” says inflationary environment and $9,216

Christopher Field. “As it bears markets did not react kindly.”

$12,776
down going into this winter, Leisure
$7,068
you’re likely to see even further A subsequent U-turn by that
contraction in activity, as people government after the pound fell $31,379
are going to be very focused on to an all-time low of US$1.03 Construction
$4,360
keeping portfolio companies means that the originally
alive and well rather than new envisaged fiscal expansion is $0
Other
deal activity.” now off the table, as is Ms. $482
Truss, who resigned in mid-
Another theme playing out is the October and has been replaced $833
Agriculture
weakness of currencies relative by the more fiscally constrained $282
to the US dollar. The DXY index, Rishi Sunak. However, if there
$0
which measures the strength of is one thing that investors Defense
the greenback versus a basket do not like, it is uncertainty. $28

of major currencies including And if 2022 has proven to be

the euro and the pound, reached anything, it has proven to be 2021 Q1-Q3 2022
a two-decade high in Q3. This unpredictable.

37
Liquidity events

In light of the difficult deal WHAT ARE THE BIGGEST CHALLENGES YOU EXPECT TO FACE WHEN IT COMES TO
environment, it should come as EXITING INVESTMENTS OVER THE COMING 12 MONTHS? (SELECT TOP TWO)
no surprise that the volume of
exits in the first three quarters Securing a buyer willing to pay 25%
of 2022 dropped substantially the desired valuation in a sale 40%
amid a depressed/risk-off market
year on year. A total of 1,695 38%
deals were announced between
Pro-forma financials to adjust 40%
the start of the year and the
for supply chain constraints 29%
end of the third quarter—39% and pandemic after-effects
40%
below the same period the
previous year. Value fell by a 40%
similar proportion, down 32% Ability to list portfolio companies 31%
to US$474.1bn globally. 35%

In many instances, sellers Determining the right type 40%

of exit (e.g., IPO vs. 40%
remain wedded to the rich auction vs. negotiated sale) 27%
valuations at which they
marked their assets last year Receiving an all-cash offer 20%
and are reluctant to part with versus a combination of
26%
cash and deferred consideration
these at the prices that buyers to bridge perceived valuation gap 33%
are willing to offer today.
Until there is a marked macro Determining whether to hold a 30%
portfolio company for longer to take
improvement, with inflation advantage of expected growth
29%

showing signs of topping and or until the market recovers 18%

therefore less need for central

5%
banks to pump the brakes with Finding a buyer equipped
5%
to grow the company further
monetary tightening, it should 9%
be expected that headwinds
will persist.
Asia-Pacific EMEA North America

38
Respondents are cognizant of
this reality. When reflecting
caused this market to slow
down significantly.
“IPOs are effectively shut
on the biggest challenge to
returning capital to LPs over With valuation gaps in mind,
off at the moment. So,
the next year, 38% of North
America respondents and
GPs are understandably giving
some consideration to the
sellers are required to
40% of EMEA respondents
highlight difficulty in securing
potential drag on returns and
what it may mean for their
choose between running
a buyer willing to meet their compensation. Sell below an auction or pursuing
desired valuation amid the expectations and this will
current risk-off environment. weigh on the fund’s IRR. a bilateral negotiation,
The same proportion of EMEA Holding out for a higher
respondents also point to multiple for an extended which may often be the
challenges in determining the period will also put pressure
right type of exit, with 40% of on IRRs. preferred option if they
Asia-Pacific respondents also
seeing this as a top challenge, It seems, however, that GPs can’t drive sufficient
compared with just 27% of
North American respondents.
are optimistic about the
near-term outlook and that competitive tension for
“IPOs are effectively shut
perhaps the brunt of the
market drawdown may have
their assets.”
off at the moment. So, sellers already played out. A sizable
are required to choose majority of EMEA respondents
Christopher Field, Dechert LLP
between running an auction (80%) and North American
or pursuing a bilateral respondents (82%) believe
negotiation, which may often that exit market conditions
be the preferred option if in the next 12 months will
they can’t drive sufficient be more favorable. If they are
competitive tension for their not bullish on the remainder
assets,” says Christopher of 2022, hopes are high that
Field. “The geopolitical 2023 will have more to offer.
backdrop in Europe has been The average length of a bear
especially difficult.” market for the S&P 500 is
289 days, which would put
The drying up of options in a bottom for the US equity
the SPAC space is markets in Q4 this year.
also a factor. Whereas a However, bear trends during
boom in SPAC listings offered recessionary phases typically
a bevy of exit opportunities last for extended periods,
for privately held companies which could push the current
in the second half of 2020 down-market out toward the
and first quarter of 2021, latter half of 2023 or beyond.
regulatory changes and
poor stock price performance
post-deSPAC mergers has

39
Asia-Pacific respondents are HOW FAVORABLE DO YOU THINK MARKET CONDITIONS WILL BE FOR PRIVATE EQUITY
much more pessimistic than LIQUIDITY EVENTS IN THE NEXT 12 MONTHS?
their counterparts, with only
45% saying they expect exit 80%

conditions will be favorable in 71%

70% 66%
the coming year. Meanwhile,
10% say that conditions will 60%
be unfavorable, compared
with only 2% and 3% in 50% 45%
North America and EMEA,
respectively. 40% 35%

This sentiment gap may reflect 30%

some laggardly performance

20% 16% 17% 16%
among certain Asian indices.
For example, the Hang Seng 10% 9% 10%
10%
China Enterprises Index, which 3% 2%
0% 0% 0%
tracks companies listed on the 0%
Hong Kong Stock Exchange, in Very favorable Somewhat favorable Neutral Somewhat unfavorable Very unfavorable
September reached its lowest
ebb since the global financial
Asia-Pacific EMEA North America
crisis 14 years prior, falling by
as much as 14% in that month
alone. China’s strict lockdowns
have not been kind to asset
valuations, and while COVID-19
infection rates have fallen since
peaking in April, the prospect
of a repeat in the winter months
and the recency bias of having
just endured strict lockdowns
is potentially fueling investor
pessimism relative to other
geographic markets.

40
41
ESG

ESG is here to stay and the

PE industry is still coming
Sustainable Finance Disclosure
Regulation (SFDR) last year,
Our research shows
to grips with managing
everything that comes with
under which GPs are not only
integrating ESG considerations
that in EMEA, of which
it, from rising compliance
requirements to the increasing
into their investment decisions
and processes, but also
Europe is by far the
reporting demands of LPs. launching impact funds that biggest market, GPs see
The very largest private meet the SFDR’s Article 9
capital firms, however, had standards. These so-called their portfolio companies
already been making progress, “Dark Green” funds are those
embedding investment with an expressed sustainable as making great
practices long before ESG investment objective.
became a hot button issue advances on more social-
in the media. The UNPRI, Meanwhile, the “S” in ESG is
the world’s largest voluntary gaining traction in line with oriented key performance
corporate sustainability
initiative, has over 7,000
societal expectations and as
companies’ ESG approaches indicators (KPIs).
signatories—more than 1,000 mature. For many businesses,
of which are PE and venture especially asset-light tech
capital firms—four times the and software companies,
count from five years ago. environmental impacts are a
relatively simple puzzle to solve,
Regionally, Europe has been with the next port of call being
the torchbearer for ESG diversity, gender, equality and
regulations, both across listed inclusion (DEI) issues. Our
capital firms and private research shows that in EMEA,
markets. A cornerstone of this of which Europe is by far the
push saw the EU introduce the biggest market, GPs see their

42
portfolio companies as making HOW WOULD YOU DESCRIBE THE DIVERSITY, GENDER, EQUALITY AND INCLUSION
great advances on more social- INITIATIVES AMONG C-SUITE EXECUTIVES IN YOUR PORTFOLIO COMPANIES?
oriented key performance
indicators (KPIs). 60%

51% 51%
Six in ten respondents from 50%
the region describe DEI
initiatives among C-suite 40%
40%
executives in their portfolio
companies as either good 31%
(51%) or even excellent (9%). 30%
25% 25%
Far fewer respondents from 22%
other regions report the same
20%
level of progress, with only 16%

30% and 38% of those based 11%

9% 9%
in APAC and North America, 10%
5% 5%
respectively, giving the same
0% 0%
positive appraisal, instead 0%
more commonly describing Excellent Good Average, Average and static Poor
but improving
DEI initiatives in their
portfolio companies as average
Asia-Pacific EMEA North America
but improving (40% and
51% respectively).
HOW WOULD YOU DESCRIBE THE DIVERSITY, GENDER, EQUALITY AND INCLUSION
This echoes respondents’ view INITIATIVES AT THE GP FUND LEVEL?
of DEI within their own industry.
Once again, three in five EMEA 60%
respondents are complimentary 54%

about these initiatives at the

50%
GP level. Their counterparts 45%
42%
in North America are lagging 40% 40%
(51%), but not nearly to the 40%
extent of APAC GPs. 31%
30%
Not a single APAC respondent
considered the DEI initiatives
20%
at the GP level to be excellent, 15%
and while 40% said progress on
9% 9% 9%
diversity was good, respondents 10% 6%
more frequently said it
was average yet improving 0% 0% 0% 0%
0%
(45%), versus North America Excellent Good Average, Average and static Poor
respondents (40%) and EMEA but improving
respondents (31%).
Asia-Pacific EMEA North America

43
In a continuation of a theme, ON A SCALE OF 0 TO 5, HOW IMPORTANT ARE THE FOLLOWING ESG CONSIDERATIONS
EMEA GPs ascribe more WHEN ADDRESSED AT THE GP LEVEL IN MAKING PORTFOLIO COMPANY INVESTMENT
importance to the diversity KPIs DECISIONS? (WHERE 0 IS NOT IMPORTANT/CONSIDERED AT ALL AND 5 IS EXTREMELY
of companies when deciding to IMPORTANT/TOP PRIORITY)
push the button on a deal than
fund managers elsewhere in the 4.1
world. Workplace factors such 4.1
as DEI and health and safety 3.9
score on an almost level pegging 3.9 3.8
3.9 3.9
(4.06) with environmental 3.7
factors (4.14). Further, EMEA 3.6
3.7
3.6
PE dealmakers are notably 3.5
more conscious of marketplace- 3.5 3.4
related ESG considerations, 3.4
such as responsible products
and supply chains, which are far Environmental (such as Workplace (including Governance Impact on the Marketplace
lower in importance for North waste management, talent attraction and (including board level community, local (including responsible
American and APAC GPs. reducing carbon retention, employee responsibility, economic products and
emissions, energy use, development, equality anti-bribery and development, human marketing,
global warming and and diversity, corruption, business rights sustainability with
Adaption barriers other factors that occupational health ethics) supply chain)
impact the and safety)
While research has shown that environment)
integrating ESG into dealmaking
Asia-Pacific EMEA North America
is value-additive, building out
the capabilities to achieve this
requires investment in and of
itself. Many portfolio companies
are reluctant to embrace ESG track and manage ESG risks investment means it is difficult
initiatives because they see and opportunities. for PE firms to compare
them as a costly compliance different deal opportunities
exercise with little direct or This is closely followed by and make informed decisions
immediate financial benefit— the difficulty in creating about where to allocate capital.
to say nothing of the political standardized documentation to In spite of these challenges,
backlash against ESG in some gather, monitor and evaluate forward-thinking PE firms are
regions in the United States, as ESG data, cited by 58% of overcoming these obstacles
discussed below. those based in EMEA, 64% and reaping the benefits of
of those in North America and being the earliest adopters of
When considering the most 70% in APAC. Private markets responsible investing.
significant barriers to greater are inherently less transparent
adoption of ESG initiatives than their public equivalents. Answering to LPs
in their funds or portfolio Many private companies do Private equity firms are coming
companies, 60%-75% of not disclose comprehensive under increasing pressure from
respondents point to the information on their ESG their investors to incorporate
added costs and resources performance, and the lack of and integrate ESG. The
to retain qualified talent and standardization around what investors are motivated by a
create capabilities to identify, constitutes an ESG-friendly number of factors.

44
WHAT ARE THE MOST SIGNIFICANT BARRIERS TO GREATER ADOPTION OF ESG INITIATIVES IN YOUR FUND OR IN YOUR
PORTFOLIO COMPANIES GENERALLY? (SELECT TOP THREE)

Added costs and resources to retain qualified 75%

talent and create capabilities to identify, 66%
track and manage ESG risks and opportunities 60%

70%
Difficulty in creating standardized documentation
58%
to gather, monitor and evaluate ESG data
64%

40%
Concerns over whether ESG metrics translate into better
58%
returns or performance at the portfolio company level
64%

Lack of understanding of ESG issues at the 55%

investment committee level or 49%
among portfolio company C-suite executives 36%

Absence of uniform standards or metrics in 40%

the PE industry to measure ESG impact 32%
or performance at portfolio companies 38%

Absence of regulatory oversight to mitigate 20%

greenwashing claims and risks associated with 37%
inaccurate reporting and substantiation of claims 38%

Asia-Pacific EMEA North America

WHAT ARE THE MAIN DRIVERS FOR LPS WHEN MAKING ESG INVESTMENT DECISIONS? (SELECT TOP TWO)

60%
Change of investment policy and/or strategy 54%
46%

30%
Investment potential, as measured by better returns 49%
42%

45%
Portfolio risk management 37%
40%

30%
Response to external changes, such
37%
as regulations or societal pressure
36%

35%
Stakeholder demands and investment committee decisions 23%
36%

Asia-Pacific EMEA North America

45
First, there is a recognition Of course, the purpose of In terms of the due diligence
that sustainability is important private equity is to deliver that LPs apply to GPs to
for the long-term success attractive risk-adjusted returns understand their ESG progress,
of businesses. A growing and 49% of EMEA respondents EMEA respondents report
body of evidence suggests and 42% of dealmakers from that the greatest emphasis
that enhancing portfolio North America believe that is put on diversity at the
companies’ ESG progress can LPs are primarily motivated portfolio company level, giving
have a material impact on by the potential for ESG it an average importance
financial performance, thereby integration to deliver this rating of 3.9 out of 5. This
generating superior returns. outperformance. Only 30% of compares with 3.5 and 3.1
Second, LPs are increasingly APAC respondents highlight average ratings given by their
conscious of the reputational this driver, instead seeing North America and APAC
risks associated with backing portfolio risk management as counterparts, respectively.
PE teams that do not take ESG being a strong attraction for While large funds have globally
seriously, driven by the fact that the decisions made by their diversified investor bases, they
many institutional investors investors that are motivated by tend to skew toward LPs in the
have their own fiduciary ESG considerations. same region, particularly as
stakeholders to answer to.
GPs that do not take steps to
address LPs’ concerns may find
it increasingly difficult to raise
capital in the future.
HOW SIGNIFICANT A PART DO THE FOLLOWING INITIATIVES PLAY IN THE DUE DILIGENCE
When asked what they PROCESS OF GPS AND ESG POLICIES? (WHERE 5 IS EXTREMELY IMPORTANT AND 0 IS
view as the main drivers NOT SIGNIFICANT AT ALL)
influencing LPs’ ESG-led
investment decisions, the
biggest share of respondents
across geographies point to 4.0 4.0
a fundamental change of 3.9 3.9 3.9
investment policy or strategy 3.9 3.9

by investors. Unlike family 3.8 3.7

3.7 3.7
offices and high-net worth 3.6
individuals—many of whom
3.6 3.5
access the asset class through 3.5 3.4
funds of funds—pension 3.3
programs, sovereign wealth
funds, endowments and 3.1
insurance companies have
trustees and customers
Clear ESG Clear ESG policy Quality of ESG Clear ESG policy Diversity at Diversity at
that have increasingly high reporting standards at the fund level metrics for at the manager management firm portfolio company
expectations with regard portfolio level level level
companies
to ESG.
Asia-Pacific EMEA North America

46
GPs offer concessions to their
earliest backers. Therefore,
of investment, or state attorney
general opinions. Additionally,
A growing body of
European LPs seem to have
moved up the maturity curve
Louisiana and Missouri have
divested a combined US$1.2bn
evidence suggests
in their analysis of GP progress
by zoning in on DEI progress
from BlackRock over the asset
manager’s ESG push.
that enhancing portfolio
within their portfolios.
The stated aim of these actions
companies’ ESG progress
Across regions, respondents has been to force investors can have a material
highly rate the significance of to consider financial returns
ESG initiatives in the diligence above other considerations. impact on financial
process undertaken by LPs This ignores that studies have
when considering where to consistently found a correlation performance, thereby
invest. Respondents score between high ESG ratings
clear ESG reporting standards and stronger financial returns. generating superior
between 3.8 and 4.0 out of Moreover, as BlackRock’s CEO
5 as being investors’ primary Larry Fink wrote in his much- returns.
focus in their ESG due read letter to CEOs in 2020,
diligence, with a clear ESG “Climate risk is investment
policy at the fund level scoring risk.” Climate catastrophes
between 3.7 and 4.0 out of 5. around the world will have a
PE firms would do well to keep significant impact on the global
this in mind before launching economy and it is prudent to
new funds and having to field manage those risks.
pointed questions about how
they are integrating ESG into
their own operations and those
of their portfolio companies.

A backlash
At the same time, there is
a growing backlash to ESG.
Most notably, in August, the
State Board of Administration
of Florida, which manages the
state’s public sector pension
fund, approved a resolution
that prevents the state’s
pension fund from considering
ESG factors when making
investment decisions. At least
nine other states have adopted
anti-ESG regulations in the
form of investment resolutions,
decisions by the state’s board

47
 Conclusion

PE is nothing if not resilient. over a three- to- five-year (or managers putting their
As an industry, it has proven even longer period) and so extensive networks and
time and again that it can dial up their deployment specialist knowhow to work.
outperforms public markets, when the opportunity If there is one watchword as
especially so through down- strikes. Now, another one it pertains to PE during this
cycles. Some of the best of those opportunities is uncertain time in markets the
fund vintages over the past presenting itself (albeit world over, it is resilience. As
two decades fell immediately this time in a high interest the industry confronts these
after the dotcom bubble rate environment). Another challenges, it is once again
burst and amid the global industry advantage is PE’s being asked to demonstrate
financial crisis. This is operational skills, which that resilience.
because PE funds have allows for active shareholder
relative flexibility to invest engagement and fund

Tap private credit and Roll up your sleeves

NAV facilities Private equity’s calling card
Debt availability and the cost is its ability to transform
of this financing is clearly a companies. Given the more
key concern right now. While difficult exit environment,
private credit does not come GPs should focus on leveling up their
cheap, these funds are well equipped with existing assets whether by rationalizing
dry powder and have shown a willingness costs or seizing market opportunities
to step in as banks and capital markets as direct competitors come under
have pulled back. Expanding networks and pressure, or even improving their
building relationships with debt funds and portfolio businesses’ ESG credentials.
other sources of non-traditional financing This will help to attract buyer interest
give PE funds the best chance possible as conditions improve and ultimately
of supporting new deals and shoring up maximize returns on capital.
the balance sheets of existing portfolio
companies, as well as returning capital to
LPs by harnessing NAV facilities.

48
Set realistic fundraising Selective bets
expectations Valuations have not been equally
As LPs become more judicious with hit across all sectors. Fund
their capital commitments, GPs that managers will need to play to
need to replenish their funds should their strengths, but there may
plan their fundraising on the assumption be rare opportunities in areas of the economy
that the process will take significantly longer that have been most severely stretched by
to conclude than in recent years, as well as spiraling inflation and rising interest rates,
consider creative solutions to ensure they have and which investors have withdrawn capital
additional capital to deploy, such as interim from in the flight to safety. Stressed and
funding vehicles based around a single asset distressed companies in the tech and consumer
and continuation funds. With stock markets in discretionary industries, for example, have
the doldrums, there has been less incentive for the potential to offer handsome rewards once
investors to allocate to PE. The ongoing capital inflation rolls over and there is a clearer view on
concentration effect calls on fund managers to near- to medium-term economic growth.
truly stand out and articulate how they will be
able to replicate past successes.

49
About Dechert About Mergermarket
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