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The secondary market will reach new heights in 2023. There will be a significant reduction in dry powder on the private market.
After a record-breaking 2021, it's hardly surprising that private equity activity was unable to keep pace with 2022. Nevertheless, despite macro and geopolitical headwinds, global investment activity was only marginally lower than in 2021.
Global outflow activity, on the other hand, collapsed and was almost halved compared to the previous year. This drop-in exit activity in 2022 - compared with high investment activity - will put further pressure on investors.
Fundraising was mixed. Most of them were carried out by mega-funds, which attracted investors looking for safe havens, while lesser-known and emerging managers struggled to raise funds. As a result, overall dry powder on the market fell for the second year running.
What does this mean for investors trying to navigate an all-season climate in 2023? As a very unpredictable 2022 shows, it's extremely difficult to make predictions in the current environment. Nonetheless, we hope that our outlook for 2023 offers some interesting reading and insight into short- and long-term market trends.
The secondary market will reach new heights in 2023. With a combination of oversupply from liquidity-hungry investors and strong demand from secondary players, few would bet against a busy year in the secondary market. The increase in secondary opportunities is due to the combination of the denominator effect and reduced distributions. In addition, secondary market players are gearing up with many secondary funds of various shapes and sizes on the market. Given the huge range of transactions that are likely to be available, and the specialization required to carry out certain transactions, we believe there will be many interesting opportunities to be seized.
There will be a significant reduction in dry powder on the private market, which will lead to lower entry prices. In a difficult fundraising environment, while blue-chip large-cap and mega-cap managers can still attract investors, some of the strongest managers in the middle market will fail to meet their targets, or drop out altogether. We can see that there will be less capital looking for deals, and therefore lower prices, especially as debt is more expensive. In addition, there will be more opportunities to co-invest alongside or co-lead operations with these managers, who need the support of experienced investors.
Secondary buyouts will move up a gear. Representing 42%* of all exits in 20221, secondary buyouts will become the majority exit type, as large companies look to deploy their expanding arsenals, while mid-sized companies will be motivated by the search for liquidity for their best assets.
Family offices and asset managers will increase their share of the private equity market. Driven by the desire to increase their exposure to the best-performing asset class of recent years, and attracted by "knowing what you own", family offices and wealth managers will increase their allocations to private equity in 2023. Institutional investors such as pension funds and insurance companies will at least strive to maintain their allocations, but may be more stretched depending on the performance of other asset classes.
Whatever happens in 2023, we're likely to see further innovative trading in the face of tougher conditions. We are certainly looking forward to an exciting year of exits mainly driven by liquidity from secondary transactions.
* Pitchbook