Excerpt from Private Equity Wire Global Outlook, January 2023 - Dealmaking: Davis Noell, Senior Managing Director, Providence Equity Partners
2022 was a year of great change for private equity. The correction and volatility in the public markets spilled into private equity with deal activity slowing down significantly, as buyers and sellers struggled to find pricing equilibrium. The heated auctions with constantly increasing valuations in 2021 gave way to a dearth of new deal opportunities and a reset on price expectations in 2022. This also drove some multiple contraction in the private markets, albeit not to the same extent as the public markets. Another factor was that many private equity firms were feeling overexposed from investing too much capital last year, and were hesitant to invest this year. We were fortunate that we purposefully slowed down our investment pace in 2021. In 2022, we’ve been able to find attractive new investment opportunities using our sector-focused approach to leverage longstanding relationships, and as a result have invested a similar amount to last year.
Ultimately, there is still substantial dry powder across private equity and a desire to invest more in 2023. As long as there is relative stability in the economy and markets, we would expect that deal activity should pick up significantly. One area of potentially increased deal making in particular would be take-private transactions. With equity valuations depressed, and a number of recent IPOs well below offering price and orphaned in the public markets, look for private equity firms to be more aggressive in pursuing takeprivates. Public company boards will be in a better place to accept those offers next year as the 52-week highs will no longer include the 2021 stock prices, and more closely reflect current conditions.
As we look into next year, we see many attractive potential investment opportunities in our core markets of media, communications, education and technology. Some themes we like are the growing demand for live events and premium content, the need for ubiquitous high-speed broadband, and the digitization of education. All of these are themes which can create long term secular growth and where there are really good companies with strong financial models and profitability. We are sector focused, but we are more business model agnostic. We believe this has helped us find strong, growing businesses at more reasonable multiples, away from the SaaS business model. If B2B software was the hottest part of the market prior to 2022, we believe that more private equity firms will be seeking opportunities outside of that area, and driving deal activity in services, data and consumer-facing companies.
Certainly we are closely monitoring the overall economic conditions and watching for signs of a recession, and that is the looming risk for 2023. Sitting here today, we would expect the uncertainty to continue, but we see a massive recession or another big move down in the stock market as unlikely. More likely, we believe that next year will bring bouts of volatility but a market that is stable enough to enable a more active private equity dealmaking environment. In addition, private equity activity levels should continue to benefit from increased capital allocations to private equity and a long-term shift from public to private markets.