Looking ahead at 2023 PE landscape with quantitative data from 2022
PitchBook's latest Quantitative Perspectives report highlights how economic uncertainties might impact the PE landscape next year.
The US private equity market has had a mixed year. Even though investors were facing slow economic growth and aggressive rate increases by the Federal Reserve, deal activity was resilient. The new year brings with it challenges, such as higher interest rates, tightening of financial conditions, further economic slowdown, or even recession. The latest Quantitative Perspectives Report from PitchBook outlines how these uncertainties could impact the PE landscape in 2019. Although inflation has shown signs of slowing in recent months, fears about a recession linger. According to the report's quantitative recession model, 65% of the probability that the US will enter recession in 2023 or 2024 is despite slowing economic growth. Private equity faces a host of problems this year due to macroeconomic headwinds, which included a more challenging borrowing environment. Leveraged loan markets, which are the primary source of financing buyouts with debt, suffered a significant drop. According to the report, the total amount of leveraged loans used to fund buyouts fell to $22.3 billion in the six-month period from May to October. This is the lowest level since 2020. The report shows that PE investors did a lot of buyouts in 2022 despite the weakening syndicated loan market. They borrowed directly from lenders and bypassed banks syndications to avoid the problem. In the face of banks' pullback, private debt funds increased their share in the buyout debt market. For leveraged companies, the increased interest payments will be more difficult due to credit spreads and benchmark rates. In a scenario with benchmark rates around 4%, a company that has a leverage ratio of 6x will see its interest coverage ratio (a measure of its ability to repay its debt) drop to 1.4x. This would represent a substantial drop from a healthy interest cover ratio of 3.5x in a scenario where short-term rates are close to zero. Data from Leveraged Commentary & Data (a company PitchBook acquired back in 2022) shows a 5.9x average leverage ratio for buyout deals financed through the leveraged loan market in this year to the end September. This figure is similar to previous years. In the next quarters, deal activity in buyout transactions will be affected by uncertainty around the economy and monetary policies. According to the report, the volume of buyout transactions in the fourth quarter through September 2023 is expected to be 10% less than the previous quarters. Continue reading: Q4 2022 Quantitative perspectives: When the tide goes out
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