PE trends for Q3 explained in five charts

Private equity deal activity in the US slowed in Q3 2022 as investors took a more cautious approach in the face of rising interest rates, high inflation and other economic uncertainties.

Here is a closer look at five key trends from our latest US PE Breakdown, which explores how firms are navigating a challenging macroeconomic environment and a volatile market. 
                     

US PE dealmaking came under pressure as a tightening monetary environment and uncertain economic outlook weighed on the market. 

PE managers closed a total of $280.64 billion worth of deals over Q3, representing a year-over-year decline of 20.4%, according to PitchBook data. However, deal count—2,255 closed deals—was up by about 3.7% from the same period last year. 

Facing challenges to finance new deals, PE investors gravitated toward smaller deals and add-ons, said Tim Clarke, a senior PE analyst at PitchBook and co-author of the report.  
   

Add-ons have made up an increasing proportion of buyout activity this year. As of Q3, add-ons have accounted for 77.9% of this year's total buyout deals, the highest ever recorded, according to PitchBook data. 

Investors favor add-ons more than platform acquisitions because these deals typically come in smaller sizes, making them easier to finance. In addition, buyers and sellers tend to disagree less often on valuations in these deals. 

Analysts expect deal volume for add-ons to climb further amid the existing market downturn. 
   

Deal value and volume for US PE exits dropped markedly this year from 2021's record level, with PE investors logging an estimated $293 billion in exits through Sept. 30.

The decline in exit activity is partially due to a frozen IPO market, which took a hit from increased market volatility and the drop in public stock markets. Public listings, which contributed to about one-third of PE-backed exit value in the US over the last two years, represented only 1.6% of the total exit value so far this year, according to the report.
   

Take-private dealmaking remained robust through Q3 as the decline in public market valuations gave PE investors a chance to scoop up deal targets at compelling prices. 

The total deal value of take-privates topped $100 billion in 2022, marking the second year in a row of hitting that checkpoint since 2007, according to the report.

GPs' abundance of dry powder has given rise to a proliferation of mega-deals worth $1 billion and up.

However, financing the buyouts of those large public companies has become harder, owing to the challenge of syndicating debt facilities through the high-yield bond and syndicated loan markets. 

The difficulty of securing debt financing to fund the Citrix take-private is emblematic of these struggles. Wall Street banks had to swallow $700 million in losses as they completed the sale of a $8.55 billion debt package to back that leveraged buyout. 

Against that backdrop, PE sponsors more frequently resorted to private debt funds, which funded take-private deals for companies including Avalara, Ping Identity and Hanger. Buyers in some private debt-funded deals made a smaller equity contribution than the 70-30 stock-debt split that is commonly seen in deals financed by bank loans.
   

PE managers continued to blaze a fundraising trail through the first three quarters of 2022, the report showed. PE firms in the US raked in an estimated $258.8 billion across 296 funds through Sept. 30, in line with last year's lucrative run. 

However, analysts are not bullish on the prospect for PE fundraising to end out the year and predicted a majority of vehicles that are still marketing will delay their closings to next year.  

The fundraising market is overcrowded, as limited partners struggle to maintain re-ups, the report said. Many LPs already reached their allocation targets to private equity earlier this year, it said. 

Accordingly, investors are likely to prioritize large and established fund managers with which they already have relationships. This means emerging and middle-market managers could be left out. 

There's early evidence of this dynamic playing out. 

Mega-funds, defined as funds of more than $5 billion, raised $137.4 billion in the first three quarters of this year, still contributing to a larger portion—over 50%—of total capital raised. 

At the same time, fundraising for midsized PE funds and emerging managers decelerated this year. 

Featured image by Chaosamran_Studio/Shutterstock

This article originally appeared on PitchBook News