Private equity GPs remain cautiously optimistic about dealmaking, fundraising and performance, according to Investec’s 12th annual GP Trends Report.
- Only half expect capital raised to exceed predecessor fund by 25%-50%
- The proportion expecting improved returns over the next two years drops to below half
- As dry powder builds, majority will deploy similar amount of capital compared to last year
Private equity GPs remain cautiously optimistic about dealmaking, fundraising and performance, according to Investec’s 12th annual GP Trends Report.
Despite current industry headwinds and macroeconomic challenges, the majority of the 150 GPs polled expect to deploy more or at least the same amount of capital by the end of this year as they did in 2021, the report found.
GPs still have large sums of dry powder to invest – $3.6 trillion globally, across all private market strategies, according to figures used in the report. Many of these GPs are expected to see cooling asset valuations as a buying opportunity in the months to come. While there is still a risk of deals negotiations breaking down, around half of the GPs surveyed expect asset valuations to fall over the next 12 months.
Among dealmakers there has been a pivot towards more defensive sectors against the backdrop of an increasingly volatile economy. Only a quarter of respondents rank TMT as an attractive investment sector, down from 47% of GPs favouring TMT in 2021. Investec believes this may be the consequence of a rebound in appetite for defensive assets and a rebalancing of portfolios away from tech, where firms invested heavily through the pandemic but are adjusting to the corrected valuations of private and public technology companies through the course of 2022.
In terms of fundraising, most of the GPs surveyed expect to raise more, or at least the same amount, of capital for their next funds. Almost half (46%) expect the size of their next fund to exceed its predecessor by 25%-50% and a fifth of survey participants see the size of their next fund exceeding its predecessor by 50%-100%. However, a tilt by LPs in 2022 towards larger managers is leading to a potential bifurcation with a third preparing for flat fund raises the next time they go to market.
GPs are positive overall about returns, though not as bullish as they were in 2021. In last year’s survey, two-thirds of respondents said returns over the next two years would be better in 2020. This year that proportion has decreased to 47%. There is bifurcation across the industry here too: almost 63% of respondents in the larger funds category anticipate superior returns over the next 24 months to be better than 2021.
Despite current challenges with staff availability, supply chain bottlenecks, wage and materials inflation, and rising energy costs, the survey findings show GPs are relatively confident in their portfolios – most (54%) expect to see EBITDA growth across their portfolios of between 10%-25%.
Key Takeaway | GPs remain confident on all fronts but a marked shift in sentiment is evident going into 2023
