Despite Everything, Private Equity Dealmaking Is Still Going Strong

Take-private deals and add-on acquisitions have been especially popular this year.

Illustration by II

Illustration by II

Despite macroeconomic headwinds coming from every direction, private equity dealmakers have still had a busy year.

Private equity deal value reached $819 billion in the first three quarters of 2022, a figure that’s already higher than any previous annual amount on record except for 2021, according to the latest PE report from PitchBook. And although the $819 billion is still dwarfed (albeit with a quarter to go) by the 2021 figure — $1.235 trillion spread over 9,000 deals — it nevertheless signals that the private equity industry has at least returned to the “old normal,” according to the report.

Take-private deals are one of the areas that have attracted the most attention from private equity firms. They are expected to reach $100 billion in deal value for a second consecutive year, “a first for the industry in more than a decade,” according to PitchBook. The enthusiasm over take-private deals is largely driven by the massive public market sell-offs in the technology industry, as well as the large amount of dry powder held by private equity firms.

Add-on acquisitions, which refer to PE firms buying smaller companies that can be bolted on to existing holdings, have also become a big part of the mergers and acquisitions market. As of the third quarter, the number of add-ons as a percentage of buyout deals reached a new record of 78 percent, according to the report. Compared to large-scale acquisitions, add-ons are a more conservative strategy that allows PE firms to scale up in the current environment.

Deal activity is especially resilient in the technology and healthcare industries. In the tech sector alone, private equity firms closed 254 deals with a combined value of $57.5 billion in the third quarter, according to PitchBook. Although the figure is not comparable to the one seen in 2021, it is in line with the historical quarterly average, the report added. In the healthcare sector, large deals involving ophthalmology and eating disorder treatments have gained strong momentum.

Despite the robust dealmaking environment, there are still challenges facing private equity leaders in the remaining months of 2022. For one, exit channels have become narrower over the past year due to the public market sell-offs. The exit value in the third quarter of 2022 was $89 billion, just 30 percent of the level seen in the third quarter of 2021, according to the report. Fundraising has been trending downward, too. From January to September, private equity firms raised a total of $259 billion, lagging behind 2021’s year-long record of $366 billion.

“Eventually, pent-up demand will force open the door for new public listings,” the report said. “[But] until then, the mismatch between PE investors lining up to buy rather than sell cheap assets is likely to get worse before it gets better.”