Private Equity firms, sitting on a mountain of dry powder, are leaning into a potential downturn. For certain, there are plenty of economic headwinds. Analysts are nearly unanimous in expecting a recession to land next year—they only differ as to their projections of its precise timing and potential severity. The federal funds rate is poised to tick upward next week from where it currently stands at 3.75 to 4 percent, further increasing the cost of debt capital. Credit is tight. Geopolitical turmoil has sent the price of oil soaring, fueling inflation. And as work-from-home becomes a permanent fixture, office real estate has taken a blow, with about 20 percent of office space reported to be vacant in New York City alone.

In the midst of the gloom, opportunities for PE abound.

Is it any wonder that this year the buy-side Private Equity deal count is still tracking at a rate greater than 2017-2019 levels? Deal value through Q3 topped $819 billion—equivalent to the second-highest annual total on record, according to Pitchbook.

Fundraising this year tracks close to 2021, with historically high levels of funding. PE fundraising through Q3 2022 totaled $259 billion, on pace with 2021, according to Pitchbook. Moody’s has reported that PE buyout funds, which raised $400 billion in 2021 globally, are sitting on $3 trillion in assets under management.

Moody’s expects a gradual return in leveraged buyouts by PE investors, including acquisitions of distressed companies and take-private transactions supported by lower company valuations. Sellers to PE firms are resisting reduced valuations compared to last year, limiting the ability to execute new deals. But that is likely to change. It always does.

We foresee PE firms positioning themselves for long-term growth. They are utilizing more equity in deals, doing more add-ons, and are primed to take advantage of reduced valuations once the expectations of sellers reset.

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