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After a healthy year of dealmaking in 2021, private equity investments have seen a steep decline in the latter half of 2022, falling 22% YoY, and returning to pre-pandemic levels, according to PwC’s recent “Private Equity: US deals outlook 2023.”
Higher interest rates, inflation, and economic uncertainty are driving the decline in PE capital allocation, according to PwC. But the report finds that PE is also sitting on a record $1.1 trillion of dry powder and investors are going to be looking for high value-generation targets in 2023.
“We’re in a period of intense change for PE, reflecting the acute economic environment and longer-term evolution. Success requires both navigating near-term uncertainty and positioning for future differentiation through talent, digital and ESG,” Manoj Mahenthiran, private equity lead at PwC US, said in a statement.
A recent study by Lincoln International found that financing for private deals is getting harder to find, and more expensive. As an end run around these financing challenges—particularly the unfavorable debt markets—PwC predicts that PE investors will lean away from highly leveraged buyouts and will pivot towards more innovative investment strategies like minority investments, all-equity deals that sidestep credit markets altogether, and private placement of debt.
Dealmakers will also be doubling down on long-term value creation trends like digital, talent, and ESG, according to PwC. This marks a shift away from traditional PE investment strategies of acquisition-fueled growth and aggressive cost cutting towards more sustainable value creation, according to the report.—DA