The Private Equity Market in 2023: What does the remainder of the year look like for the UK?

Going into the 2023 calendar year, industry commentators were bullish about the prospects for Private Equity, even though high inflation, rising interest rates, and the lingering threat of recession had done little to nurture optimism for the short-term future in many segments of the economy.  

Volatility in the market had slowed the pace of public deals, diminishing the competition outside of PE deals, which, according to Melanie Krygier, a Partner at Grant Thornton LLP, “is driving a decrease in valuations as well, which provides a great opportunity for PE buyers who still have a substantial amount of dry powder to deploy.” 

Public companies were looking for ways to off-load non-core operations as well as take-private opportunities to avoid a risky stock market. Tax hikes are no longer a major concern, while robust fundraising in 2022 all pointed towards there being “a ton of cash available in the PE ecosystem waiting to be deployed in transactions,” at least, according to Krygier’s early projections.  

By the end of Q1, however, this confident outlook was nowhere to be seen. According to Bloomberg data, the first quarter of this year chalked up the fifth straight decline in PE investment. M&A deal volume slumped to its lowest single-quarter level this decade, marking a 17% drop in PE deals from Q4 of 2022, and a 59% dip in investment from the same period last year.  

As acknowledged by Bloomberg Law analyst Andrew Miller: “About 2,900 of the first-quarter PE investments were venture capital (VC) deals…Q1’s VC deal volume actually increased 6% in Q4 2022 but declined 53% from Q1 2022. Despite the increase in volume, VC deal count in Q1 2023 was down 7% from Q4 2022 and down 40% from Q1 2023.” 

The dirty word on everybody’s lips appears to be “uncertainty”. The geopolitical turbulence, rapidly rising interest rates, not to mention a banking crisis that saw Silicon Valley Bank become the first bank to fail in years, have understandably triggered a slide in PE activity. This uncertainty has spread like wildfire and nurtured a crisis of confidence that has stymied dealmaking and left buyers and sellers questioning the true worth of their assets.  

Fortunately, “nothing is fundamentally broken in the global economy”, at least according to Bain & Company’s mid-year report. “Pressure is building on the industry to get things moving again. Increasingly, the question being posed to general partners is “What are you waiting for?”” But what evidence is out there to instil confidence in investors? 

Outside of the UK, inflation finally appears to be stabilising. Public markets are coming back strongly, and several PE-backed companies have been able to IPO. After twelve months of very little action, the pressure is on alternative asset managers to deploy their astonishing reserves of dry powder, which amount to four times what was held during the global financial crisis.  

The resulting liquidity crunch is forcing many limited partners to consider cashing out rather than running their investments. As Bain & Co.’s mid-year report explains, the message to fund managers is clear: “LPs would prefer you to generate liquidity than try to squeeze another half-turn of multiple from every last portfolio company.”  

Moving forward, the priority for PE firms will be to increase distributions to their LPs through whatever solutions work best, and initiate portfolio reviews of all funds to balance the firm’s value against holding on to specific assets.  

The environment has changed significantly in the past year, bringing several key considerations to the forefront with regards to retaining assets: Are exit conditions going to change significantly within the next few quarters and does securing the anticipated return require a major overhaul to account for everything that has changed? Either way, the time for decisive action has arrived.

Buchanan Capital is an independent adviser and strategic growth partner for unlisted firms operating in the financial services industry. We provide financial, corporate, and strategic advice, and invest in growing businesses with strong management, providing intellectual as well as financial capital to investee firms. Our objective is always to form deep, long-term relationships with the companies we invest in, which often entails board-level participation. 

We aim to play to our strengths by focusing exclusively on the financial services industry and its service providers. Our clients are micro, small and medium-sized businesses, privately owned, and typically owner-managed.