Private equity investors have identified the consumer discretionary sector as offering the most potential for deal-making over the next five years, driven by the expectation that an eventual easing in supply chain and inflationary headwinds will see a fast recovery in valuations, according to a new study conducted among 100 senior-level General Partners (GPs) in the UK, Europe and North America.
The research reveals that 90% of respondents rated consumer discretionary as an attractive investment opportunity, up 13% from last year, the largest rise of any sector. The utilities (85%) and energy (85%) sectors came second and third respectively, underlining private equity’s fast-growing appetite for acquiring renewable energy and infrastructure assets.
GP support for the information technology sector has dropped 10% from 92% to 82% in the past 12 months, with sentiment reflecting this year’s stark decline in valuations and interest rate hikes. The materials sector saw the biggest popularity slide – down 16% from 91% to 75% – driven by its sensitivity to inflationary pressure, the global economy, and the US dollar. The fintech sector was the least favoured by respondents, scoring just 64%, as Unicorn valuations have given way to rapid cost-cutting and staff layoffs.
The new study, ‘Private Equity: navigating challenges and opportunities in the new geopolitical climate’, was commissioned by Auxadi, a leading provider of accounting, tax and payroll services to private equity, real estate and multinationals, and was based on interviews with 100 senior-level private equity investors based in the UK, Continental Europe and North America with average assets under management of €14.4 billion.
On a regional basis, the Middle East saw by far the biggest year-on-year uptick in GP sentiment, up 15% from 60% to 75%. Buoyed by rising oil and gas prices, the rotation into less risky asset classes such as infrastructure and the regional governments’ commitment to economic diversification, more international private equity capital is set to flow into the region over the coming years.
The UK emerged overall as the most attractive investment destination over the next five years – up 7% from last year to 93% – ahead of Western Europe (89%) and Eastern Europe (77%). Despite its market dominance and exponential growth over the past decade, sentiment towards North America dropped 7% year-on-year to 76%.
Following significant disruption during the pandemic, private equity activity fared much better in 2021 as investors made up for time lost during the global lockdown. Indeed, some sources suggest a record $2.2 trillion in deals completed, almost doubling the total figure posted in 20202. Unsurprisingly, the industry has not been able to match this growth this year, with Q1 2022 recording an aggregate $326.9 billion in deals.
