February 23, 2023Calculating...

PE Pulse 2023

Our fourth annual survey of Canadian private equity and pension fund leaders deals with a critical question: how are industry leaders approaching opportunities under more uncertain and unpredictable market conditions? The results reflect this tension across key areas of focus.

Survey takeaways include:

  • Recessionary trends are expected to decrease transaction size but also provide investment opportunities
  • The valuations gap between buyers and sellers has not fully closed, with some leaders anticipating a narrowing in price expectations ahead
  • Industry stakeholders see fundraising becoming more challenging—but most are not overly concerned, and significant fundraisings are continuing so far in 2023
  • Secondary transactions could play an important role in unlocking liquidity
  • More investment is expected to focus on energy transition, aligning with the rising prominence of ESG

Executive summary

This PE Pulse 2023 report captures the sentiments of industry leaders at an uncertain moment in time. However, uncertainty often breeds opportunity—and, with valuations, access to capital and liquidity under pressure, strong investment opportunities could present themselves for well-positioned buyers throughout 2023.

While GPs have access to billions of dollars of dry powder to deploy, its availability has been decreasing in recent years. In addition, recessionary concerns persist, fueled in part by geopolitical conflicts, and rapidly rising interest rates imposed by central bankers to combat ongoing inflationary pressures.

The Canadian private equity and pension fund leaders we polled in this survey echo this caution.

Overall, there is somewhat less optimism than we have seen in previous years conducting this study. Average size of transactions is not expected to increase from last year. Fundraising is expected to remain challenging, and one-third of respondents expect it to become much more difficult. The economy is not expected to significantly improve in the short-term, and respondents expect inflation and rising interest rates to impact the overall transaction environment more than they did last year.

However, there are encouraging signs. One in seven investment professionals expect to source their most attractive targets from distressed assets. And as the expected pace of interest hikes slows down, the valuations gap between buyers and sellers may be narrowing. Very few of the professionals we surveyed reported higher vendor pricing expectations over the past year, and even fewer expect valuation multiples for new platform investments to grow in 2023. Both data points are departures from previous years.

If that gap continues to close, it is conceivable that 2023 yields an attractive vintage, similar to the vintages generated during previous economic downturns. Private equity firms will have choice opportunities, including among distressed assets.

It’s not just GPs that will need to pick their spots. None of the pension fund stakeholders in our survey expect to increase their passive private equity allocations. Secondary transactions could help free up liquidity, but LPs that wish to commit additional capital may face challenging pricing decisions.

For the first time, this year’s survey polled respondents about investments in energy transition, and responses reflect an increasing focus on ESG. Investment in energy transition in particular is expected to increase—and pension fund stakeholders are especially bullish on this space.

While respondents expect technology to remain the most active sector for private equity investments, the industry/agriculture sector rose sharply in this year’s survey results.

The private equity industry is abuzz with talk of the strong headwinds resulting from the macro environment. While our survey shows that those headwinds are expected to present serious challenges for the months ahead (more than half of our respondents believe the overall transaction environment will worse a little or a lot compared to 2022), it is interesting and perhaps encouraging that those closest to dealmaking see a number of opportunities ahead for the asset class.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

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