Private Equity Trends: What to Expect for 2022

Private Equity

Jeff Bartel

Chairman and Managing Director

The Past as Prologue

If you are looking for a word to describe financial states and markets in 2020, a good option might be “disrupted.” In investment arenas where trends are typically developed over years or even decades, the COVID-19 pandemic created chaotic carousels that saw dynamic changes unfolding over mere months or even weeks. But what came out of that environment was not all bad, and private equity trends are something investors can get excited about now and in the near future.

The Current State of Private Equity Trends

In late 2021, private equity trends point to strong markets, belief in recovery, and a robust middle market. The market started to pick up momentum in late 2020 as businesses adapted to new normals, interest rates continued to drop or remain low, and government stimulus money flowed. The momentum carried into 2021 and is expected to bolster private equity through 2022.

PricewaterhouseCoopers reported 2,346 private equity deals between January 2021 and May 2021. Compare that to the number of deals reached during the same period in 2020, and you will note an impressive 21.9% year-over-year increase.

In its 2021 Global Private Markets Review, McKinsey points out that private equity performed well despite the disruptions of the past year, outperforming public market equivalents. Some reasons for this include:

  • A growing risk appetite among private equity investors, who are charging into the disruption to pick up pieces and potential profits
  • A return to fundraising levels that matched pre-pandemic levels by Q4 2020, due in part to low interest rates and lower costs of debt
  • Dry powder reaching historic highs in recent quarters, demonstrating a desire and willingness to buy as soon as the right deal comes along

Expectations for Private Equity Trends in 2022

The expectations going into 2022 are for continued growth. Barring yet another unprecedented (and impossible to predict) event, many of the private equity trends from late 2021 should hold into the new year.

The U.S. economy, including job growth and reduced unemployment, has bounced back in ways many did not expect. Pair a fast recovery with the PE trends above, and you have a market poised to boom in all the right ways. This is why some predict a merger and acquisition activity run that will dominate the next few years starting in 2022.

Private equity is expected to play a huge role in that activity. High dry powder levels and a growing desire to acquire will combine with a large supply stream as businesses that sat tight in holding patterns through the pandemic decide to take action. As a result, it is possible that private equity could make up half of all activity in upcoming years.

Emerging Trends to Watch in 2022

Shifting markets, evolving consumer priorities, and changes that come from unprecedented times continue to create force on the market, leading to emerging trends. Likewise, private equity firms and investors are also evolving, taking on new visions and acting in the markets in ways that were not previously seen. Here are four emerging trends to watch for in 2022.

Private Equity Firms Working as Change Agents

Private equity investors are increasingly taking a long-haul approach to profits. Private equity firms are altering the landscape of acquisitions by investing in their own abilities to implement strategic visions and be active agents of change.

In 2022 and beyond, expect to see PE resources engaged in considering enterprises’ long-term or potential value if specific changes are made. Then, expect to see the buyer pour resources into the asset to make those changes happen. The takeaway for PE investors is that value may be in the eye of the beholder, and those with strategic mindsets and skills may be able to score big profits by polishing seemingly rough diamonds.

Brand Mission/Vision a Factor in Valuation Considerations

According to PwC, environmental, social, and governance (ESG) issues are increasingly important to private equity investors. In fact, according to PwC’s Global Private Equity Responsible Investment Survey 2021, more than 70% of PE investors screen opportunities for ESG issues before making an offer, and more than half have turned down partnership or investment opportunities because of ESG issues.

The takeaway here is that brand reputation matters, and how a business cares for its employees, manages its environmental footprint, and attends to social matters does not just make or break current success. Instead, it is a flag that continues to fly over the asset — for better or worse — even as ownership changes hands.

Longer Holding Periods

Private equity has always been characterized by relatively long holding periods when compared to similar types of investments. But going into 2022, expect to see that disparity increase. This is due in part to PE actors working as change agents; it takes time to work through strategic initiatives that grow value to support future profits.

Another reason for potentially longer holding periods is the increasing regulatory burden on special purpose acquisition companies. This may reduce the opportunities for PE firms to divest investments to SPACs quickly.

Continued Growth of the Middle Market

Private equity news is alight with middle market deals, and you can expect that to continue into 2022 and beyond.

According to PitchBook, investors in the U.S. middle market completed more than 1,700 deals valued at a total of around $265 billion between January 2021 and June 2021. The middle market deal numbers for Q1 and Q2 in 2021 outpaced figures for the same periods in 2019 and 2020, which is not surprising. Those strong quarters followed on the tail of extremely robust middle market deal activity in Q4 2020. No one expects those trends to change soon.

The Bottom Line

Private equity held relatively strong through the chaos of COVID, and it is staging a serious climb now and in the near future. As a result, PE firms and investors can look forward to many opportunities in 2022.