The US private equity (PE) market in 2022 aligned overall with the broader M&A trend—activity eased off considerably, year-on-year, but remained above historic levels—and like the M&A market at large, it tailed off as the year progressed, but what does this mean for the year ahead?
The value of US PE-related deals in 2022
In 2022, there was an 18 percent drop in the number of US PE deals, year-on-year, to 3,293 transactions. Total value fell 33 percent in the same period to US$696.7 billion. While these drops are large, 2021 was the highest volume and value on Mergermarket record.
As expected, the volume of buyouts held up more firmly than exits as conditions transitioned from the unprecedentedly supportive seller's market of 2021 to something closer to a buyer's market—albeit with some important caveats.
This transition is evident in the freefall in exit volume, which had already been in steady decline as far back as Q2 2021. Divestitures were down by as much as 45 percent year-on-year to 873 transactions in 2022. Value fell by 27 percent in the same period to US$363.1 billion, even though the top-three largest PE transactions in the US were all exits, according to Mergermarket. The US$71.6 billion merger of VMWare and Broadcom saw Silver Lake Partners cash out. Cerberus Capital Management took Albertsons public in 2020 and is now realizing its holding through Kroger's US$24.8 billion takeover of its competitor, Albertsons. And, when Adobe Systems made its US$20 billion Figma play, a collection of VC funds including Index Ventures, Greylock, Kleiner Perkins, Sequoia Capital, Andreesen Horowitz and Durable Capital Partners cracked open the champagne.
Out of debt
The volume of buyouts held up more firmly than exits as conditions transitioned from the unprecedentedly supportive seller’s market of 2021 to something closer to a buyer’s market.
On the buy-side, a total of 2,676 buyouts were made in 2022—an 8 percent drop in volume, but far and away the highest total on record for any year aside from the outlier 2021. The next-closest year was 2020, which saw 1,455 deals, compared to 2,905 in 2021.
It is in value terms where real weakness has been showing and there is good reason for this. The US$394.3 billion in new deals is down 45 percent year-on-year. By Q4 2022, buyout value had ebbed to its lowest level since the pandemic nadir in Q2 2020.
One main reason relates to access to debt financing (in particular the syndicated debt market), which became painfully restrictive in the second half of 2022, to the extent that some of the industry's very largest deals were simply impossible to execute on economically feasible terms. However, at lower value deals, private credit funds were willing to lend to fill the funding gap, though notably at lower overall commitment levels and materially higher yield profiles. This resulted in larger deals still being able to be executed with private credit funds clubbing up to provide the larger debt packages. For example, in May, Blackstone led a group of direct lending funds including Ares, Blue Owl and Oak Hill to provide a US$4.5 billion unitranche loan for Hellman & Friedman's acquisition of Information Resource.
Adapting to change
More recently, as macro-economic uncertainties continue to persist, even these larger unitranches have become more difficult to pull together. Private debt funds have continued downsizing their quanta to reduce their concentration risk in the face of a weakening economic outlook and the prospect of rising default rates.
For this reason, the bifurcation between relatively strong volume and depressed value is likely to persist in the near term as sponsors focus on deals that are still possible in the constricted environment. This may include smaller platform deals or minority investments that do not involve a change of ownership control and, therefore, existing debt instruments are portable.
Add-ons have also been an increasingly popular strategy in the more recent past, since current portfolio companies will already have debt agreements and borrowing relationships, making it easier to access capital for the right acquisitions, even if it comes with the potential for existing debt to reprice at closer to today's market rate.
In keeping with the Fed's "higher for longer" mantra, sponsors should expect debt financing to come at a higher cost for the foreseeable future, even if access to leveraged loans shows signs of improving in 2023. At the same time, pedigree sponsors with a long history will have experience with a higher interest rate environment and will consider lower returns to be only temporary. Such firms will lean on lending relationships they have formed over the years, and those lenders will likely continue to support them as both sets of dealmakers rely on deal activity to advance. If PE has proven one thing time and time again, it's that it is a highly adaptable industry.
