Amid the blizzard of private equity dealmaking and fundraising, here are some data points to give some idea of where the asset class is currently headed.
A quarterly report from EY in December shows that investment and acquisition activity for 2021 breached the US$1 trillion mark for the first time, growing almost 100% from 2020 to $1.2 trillion. Citing data from Dealogic, the report says technology accounted for one-quarter of deal value, the largest share.
Fundraising for growth equity funds jumped 53% from 2020 to some $102 billion. Growth capital funds are typically minority investors, able to exercise less influence over the destiny of companies than their peers. EY postulates that at least some of the growth capital momentum is driven by institutions that have already maxed out the available buyout fund opportunities, and are still looking to deploy more capital into private markets.
Meanwhile, Forbes in a report on January 16, says that “compared to the outrageous numbers of acquisitions and exits” in private equity during 2021, “the fundraising market stayed relatively sane. That may change in 2022”. It cites just eight major firms in the market in 2022 to raise a total $130 billion, compared to a PitchBook estimate of just over $300 billion for the entire industry in 2021.
Then there is a report in The Wall Street Journal warning that some firms are pushing to keep funds in being beyond their ten-year design lifespan to achieve successful exits. Institutional Investor, meanwhile, reports of private equity funds pressuring their limited partners to roll their already long-dated commitments over into continuation funds to prolong the asset holding period still further, sometimes at as little as a week’s notice.
So this is a year where private equity funds are looking to raise more money than ever for businesses they are overpaying for and have less control over, while trying to hang on longer to the assets they have because of issues exiting them, or simply to retain the money they have.
EY warns that we are now “in an environment where even mediocre businesses are commanding top dollar”, and that 2022 will bring challenges from inflation, higher interest rates, hawkish monetary policy, and continuing supply chain issues.
The Forbes report notes that institutions are still eager to invest in private equity because it can outperform fixed income.
As I’ve observed before, private equity is not only capable of far more than fixed income – when it’s not oversaturated – it’s also an utterly different asset class which should not be treated the same as a mainstream public markets allocation. The only reassuring aspect about the risk-on stampede of institutions is that private equity funds will generally lock up their money for long enough for those risks to re-emerge further down the track.
