2022 was a challenging year for Private Equity (PE) dealmakers. It was a year of two halves, where the optimism and favourable investment conditions that characterised the back-end of 2021 quickly gave way to market turmoil, geopolitical instability and economic conditions that few could have foreseen only a few months earlier.
Although we expect 2023 to remain choppy, particularly in the first half of the calendar year, the near-term uncertainty is likely to present considerable investment opportunities.
Our expectation is that PE investors will see through the short-term volatility by targeting high-quality assets that can capitalise on domestic and international trends. Businesses that can deliver on long-term investment objectives by benefiting from the transition to a low-carbon economy, widespread technology adoption and demographic shifts will be in high demand in 2023.
Despite some obvious headwinds, we are optimistic about activity levels for the year ahead.
Key themes for 2023
Increased use of takeover bids as a means to acquiring ASX-listed targets. In the circumstances where there is a valuation opportunity, no due diligence will need to be undertaken and PE bidders may be prepared to go 'hostile'.
The use of continuation funds will grow in prevalence, particularly if the IPO market remains closed and exit conditions remain challenging.
Mega-deals will return as confidence returns to the leveraged loans market.
The ATO's clampdown on equity rollover CGT relief means that PE sponsors will pay increased attention to the structuring and documentation of rollover terms.
At a portfolio company level, PE sponsors are currently focused on supply chain issues, leveraging technological advancements and ESG considerations. However, we expect cybersecurity to become the number one portfolio company risk.