Q3 | Torys QuarterlySummer 2023

Private equity: a path through the slowdown

Thus far, 2022’s slowdown in private equity dealmaking has continued into 2023 as deal participants navigate continuing macroeconomic instability, challenging debt markets and geopolitical uncertainty. At the same time, private equity sponsors have amassed significant dry powder reserves, an estimated $1.3 trillion1, which they are eager to put to work as soon as possible.

While deal activity may well remain muted in light of the macro environment, especially as far as larger, highly leveraged transactions are concerned, we’re seeing sponsors take more creative approaches to deploying capital.

Larger equity checks and equity backstops

In response to higher borrowing costs and more restrictive financing terms, sponsors are increasing the size of their equity contributions used to finance M&A transactions. With the exception of 2019, over the past six years the median percentage of acquisition debt for PE-backed deals has hovered between 46% and 52% of deal proceeds2. Year to date, that percentage has dropped five percentage points to 43.5%3.

Relatedly, we have seen sponsors offer equity backstops or equity bridges to assuage seller concerns around the availability of debt financing.

Smaller platform deals

Platform transactions with smaller enterprise value are on the rise because they require less debt financing (or may, in some cases, be entirely equity-financed). So far this year, PE-backed deals have an average enterprise value of $65.9 million4. By contrast, since 2009, the average value has hovered around $140 million5.

In times of volatility, lenders are more likely to allocate their capital to close relationships, as we have seen in many of the deals this year.

However, smaller deals can carry their own disadvantages, as they can be just as resource-intensive and complex (including from a legal perspective) as larger deals. For example, smaller targets frequently have less robust financial reporting, may not have focused sufficiently on legal and compliance issues, and often have smaller management teams, leading to bottleneck issues.

Add-on acquisitions

With challenges to achieving organic growth, firms are increasingly looking to scale existing platform companies through the addition of new assets. Thus far in 2023, add-ons have represented 62.2% of global PE buyout deal activity, reflecting an increase from the 40-60% range seen since 20146. Add-on transactions offer sponsors the opportunity to take advantage of portfolio companies’ existing debt facilities, which may offer favorable credit terms (i.e., higher leverage ratios or lower margins than could be obtained in a new credit facility) and cash flow to fund a portion of the closing proceeds, making them less reliant on new debt.

Lending relationships

In times of volatility in the debt markets, sponsor relationships with lenders, whether banks or private credit lenders (which have become a major source of funding for many PE deals), become increasingly important. Lenders are more likely to allocate their capital to close relationships when they are being more conservative. Indeed, many of the deals we have seen this year have been financed by a small club of relationship lenders.

Club deals

PE club deals, a staple of the boom cycle of the early aughts, are resurfacing. In club deals, two or more sponsors team up to acquire a target, in many cases on account of an exiting PE sponsor agreeing to roll a chunk of equity into the next life cycle of the company, alongside the new sponsor. While teaming up with another sponsor can relieve pressure on the financing side, club deals demand detailed negotiations regarding go-forward equity arrangements, which adds complexity and cost to dealmaking.


Similar considerations apply to LP co-investments. While they are a great strategy to “fill the equity box”, executing a co-underwrite transaction or a widely syndicated passive co-investment will absorb additional resources and increase transaction costs.

What’s next?

Assuming the dealmaking environment in the second half of 2023 and beyond remains similarly challenging, we expect that sponsors will continue to put creative methods to work to deploy dry powder. We will keep readers posted on what we’re seeing in the market.

  1. Ibid.
  2. “Private-Equity Giants Settle for Bite-Size Deals”. The Wall Street Journal, https://www.wsj.com/articles/private-equity-giants-settle-for-bite-size-deals-1cd6ea00
  3. “Lessons Learned: An Analysis of Private Equity Deal Performance Through the Global Financial Crisis”. eVestment, https://privatemarkets.evestment.com/an-analysis-of-private-equity-deal-performance-through-the-last-financial-crisis/

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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