The latest trends in the US private equity market

• Deal-making in a downturn

H1 of 2023 played out in a similar fashion to H2 2022 across the US PE and wider investment market. Persistently high interest rates have proven to cause challenges for funds as they mean the cost of borrowing, and servicing floating rate debt is prohibitively expensive for deals that would previously have made it over the line.

According to Pitchbook, deployment remains down by 49.2% from the quarterly peak reached in Q4 2021, and realizations are down by 67.6% from the Q2 2021 peak. To compound this, fund performance, whilst still ahead of most asset classes and strategies on a ten-year basis, has fallen to the middle of the pack on a one-year horizon basis. As a result, fundraising continues to be more difficult and is tracking 15%-25% below 2022’s first half, although other strategies such as venture and real assets have fallen hastily. 

• The impact of the Silicon Valley Bank failure

The seminal event of H1 2023 was the collapse of Silicon Valley Bank (SVB) and the mini banking crisis which followed. The impact on the PE market was small, with four take-privates announced in the immediate weeks which followed. However, the crisis created a risk-averse environment for lenders. The collapse of SVB was sudden and the full fall out from this is only just being understood. 

• Public markets have rebounded

According to Pitchbook, as of June 30, the S&P 500 was up by 17.6% on a one-year basis, in stark contrast to the 18.1% one-year negative return just six months prior. And at the time of writing (July 24, 2023) the S&P 500 is continued to rise buy a further 4.79%.

The negative denominator effect, how volatility and turmoil in the public markets impact fundraising in the private markets, is not as clear, and allocators have breathing room to distribute more to PE or stay the course. 

• The rise of leveraged buyouts

A further change and in the US investment market is that big banks have slowly waded back into the leveraged buyout (LBO) market. After taking an eight-month sabbatical on making any new commitments to large take privates, a trickle of new leveraged loan deals was announced in Q1 2023 and picked up steam in Q2.

Private credit funds continued to lend all along and were the main reason the LBO market and PE deal flow, in general, did not collapse coming out of the steepest rate hikes in more than 40 years. Instead, the industry has maintained pre-COVID-19 levels of deal activity, which used to be considered strong years before the 2020 to 2021 frenzy set the bar impossibly high.

• Valuations trend higher in the US than in Europe

PE disclosure rates on private companies in the US are significantly lower than in Europe, this means that meaningful analysis on valuation trends is difficult as the datasets are so thin. The US valuation data available trends towards large take-privates, which means the prices paid skew higher than Europe by 25-30%.