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Signs of a Pricing Power Shift Favoring Private Funds

January 13, 2023

2 min read

Key Takeaways

  • As tighter financial conditions favor suppliers of capital over the coming months, private equity funds that are actively investing capital should benefit from rising pricing power. This could improve returns for fund managers investing in 2023.

  • There has been an increase in deals by private equity funds to take public companies private - taking advantage of falling public valuations. This likely foreshadows a rebound in private market deal activity as valuations finally fall on the private side.

  • As rising debt costs increase their need for capital, companies that are dependent on external capital should eventually need to accept lower valuations to meet their needs, which we expect to revive slowing deal activity.

Monitoring private equity (PE) deal activity provides a window into how market dynamics and price pressures are unfolding. In 2022, PE buyout activity for publicly and privately owned companies diverged (see chart below). This was driven by dislocations between: 1) public and private market valuations, and 2) private company buyers and sellers.

Private equity funds increased investment in public companies in 2022
Private equity funds increased investment in public companies in 2022

PE managers capitalized on the public equity correction through take-private deals (where they buy a listed company, typically to take advantage of a perceived discount, and take them private). The total deal value for take-privates rose 33% year-over-year in 2022 to a historical high (see chart below).

Take-private deal activity rose to new highs in 2022...
Take-private deal activity rose to new highs in 2022...

Take-private activity rose particularly sharply in the tech sector, reflecting public tech stock valuation declines, with deal count up 35% and deal value up 76% year-over-year. (Source: Preqin, as of January 6, 2023.)

In contrast, private buyouts and add-on acquisitions have slowed in both deal count and deal value terms (see chart below).

even as private acquisition activity fell back
even as private acquisition activity fell back

Private sellers have been reluctant to accept lower valuations, but this is likely to change in 2023. The slowdown in activity is creating pent-up capital demand from these companies at a time when their needs are growing, given higher debt servicing costs.

Private fund managers usually invest the bulk of capital committed to their funds gradually over several years (see chart below). Managers deploying capital over the coming quarters are therefore likely to benefit from favorable lending conditions because of the tightening liquidity backdrop, which ultimately may improve returns when they eventually exit these investments.

Private equity funds steadily deploy their capital over several years
Private equity funds steadily deploy their capital over several years

To explore how Opto can partner with you to help you take advantage of these market dynamics, please get in touch with us at advisory-services@optoinvest.com.


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