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PE market resilient despite geopolitical unrest and tighter monetary policy

But there are signs confidence is faltering as private equity exit activity remains slow

Pitchbook’s latest European PE Breakdown, covering Q2 2022, has found that private equity dealmaking continues to be resilient despite a tighter policy environment.

Among its other findings was that the slow start to the year for European PE exit activity has continued, while liquidity in the fundraising market is weakening due to cyclical forces and reducing confidence.

Pitchbook said that the first half of 2022 saw just over 4,000 deals closed with a total value of €463.5bn, up 16.2% and 34.8%, respectively, from the previous year. It also said that the median deal size accelerated to €47.6m, and those greater than €2.5bn hiked nearly three times in deal value from H1 2021, the most of any deal size bucket.

Writing in the report, Pitchbook said: “Sponsors’ record dry powder levels, and the rise of private credit funds has kept the deals environment moving, as the syndicated loan and high yield debt markets come under stress. Sponsors doubled down on their investment sweet spots, as they were able to take advantage of softer multiples.

“Take-private and carveouts are expected to be standout themes of 2022, due in part to falling stock markets and companies de-leveraging to strengthen balance sheets. The business products and services sector roared to new highs in the first half, while sponsors continued to double down on information technology assets, which accounted for nearly one quarter of PE deal volume.”

It added: “In the second half of the year, we expect a more pressurised dealmaking environment due to hawkish forward guidance, slowing GDP growth, rapidly declining consumer confidence, and increasing interest rates, which is likely to cause a recession.”

Meanwhile, it said that the sharp decline in exit activity was a result of near-term risks to the European economy arising from Russia’s invasion of Ukraine, inflation, downside public market volatility, and monetary tightening.

It added: “Public listings, which drove the impressive exit activity in 2021 have diminished as PE firms shun the public markets due to heightened volatility and sharp valuation adjustments. Sponsor-to-sponsor exits were the most robust exit type in the first half, as sponsors armed with billions in dry powder were cautiously aggressive in buying PE-backed companies. Despite the near-term headwinds to strategics, they continued to acquire PE-backed companies, though at a substantially lower clip than last year.”

It went on: “We expect portfolio exits to sponsors will be the most resilient in 2022, as cash rich PE firms take advantage of lower multiples and the market dislocation. Corporates will be more focused on the short-term pressures of keeping stock prices aloft, supply chains, labour issues, and rampant inflation.”

The fundraising market is weakening, the firm said, due to cyclical forces alongside a reduction in confidence. This is buoyed by several headwinds that are causing squeezes on capital commitments.

It said: “The fall in distributions due to a weak exit market has also reduced capital raised numbers, as those distributed proceeds are usually recycled back into PE funds. In addition, quickly declining stock markets are causing more caution from LPs in allocating to PE funds as the potential for the denominator effect rises. However, against this volatile and hawkish macroeconomic backdrop, strategies including distressed and private credit, which possess considerable downside protection and floating rate structures, are seeing greater traction.”

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