Private market perspectives - H1 2022

All eyes on inflation and growth?

Much like the previous two years, 2022 has kept investors on the edge of their seats. This time, it is a mixture of rapid inflation and slower economic growth that is causing the unease. 

Inflation, as per the respective consumer price measures, was up by 9% in both the UK and US and was 8% higher in the Eurozone in June. While the inflation issue is global and appears to be less transitory than initially hoped, the impact is not as visible in some emerging-market countries.

 

Trying to tame inflation 

Central banks around the world have sought to control inflation through a combination of “quantitative tightening” (reducing the amount of available liquidity in their respective economies) and an aggressive monetary policy cycle of interest rate increases.

In the first six months of the year, the US Federal Reserve hiked rates to a range between 1.50 and 1.75%. And it is expected to raise them by a further 75 basis points (bps) following its 27 July meeting. Forecasts for the end of the year are now set at a rate range of between 3.50 and 3.75%.

Meanwhile, the European Central Bank (ECB) ended its era of negative interest rates with a 50bps increase, the first in 11 years. Rates are forecast to end the year at 1.25%.

These divergent interest rate approaches have affected the foreign exchange market, and we have seen the euro reaching parity with the US dollar for the first time in 20 years.

Private equity market shows resilience

Despite market uncertainty and macroeconomic volatility, private market investors have remained resilient and cautiously optimistic, so far this year.

Deployment across Europe and the US during the first half of 2022 totalled €464 billion and $529 billion, respectively. This compares to €344 billion and $497 billion in H1 2021. It was greater investment sizes that primarily drove these increases, and not the number of deals, as transactions were fewer but larger. Common investment themes across Europe and the US included an uptick in public-to-private activity, as declining public market valuations offer an attractive risk-reward profile to general partners (GPs).

 

Not heading for the exits 

By contrast, exit volumes were significantly lower during the first half of this year, totalling €158 billion and $190 billion across Europe and the US, respectively. Compare these levels to H1 2021, when exit volumes were €211 billion in Europe and $344 billion in the US.

This drop is not surprising, given the context of sharp valuation adjustments, public market volatility (which make IPOs a less attractive exit route for GPs), and other interrelated headwinds, which have led to softer valuations. As a result, some GPs have opted to stay private for now, to avoid the current turbulence in public markets.

 

Fund count down 

Similarly, the fundraising market has faced significant challenges. Fundraising across Europe during the first half of 2022 totalled €28 billion, with a fund count of 40. In the US, it was $176 billion over the same six-months, with a fund count of 191. Both regions are heading towards the lowest fund count totals in almost a decade. It is worth noting though, that this follows unusually robust years in 2020 and 2021.

Private equity firms still have large amounts of dry powder to deploy. However, we expect the slower deal environment to last a while longer, as buyer/seller expectations continue to rebalance and the economic environment crystallises.