5 trends to watch out for in European Private Equity in 2023 

As we move into 2023, the economy is still feeling the effects of increasing interest rates, high inflation, war in Europe, supply chain issues, and labour shortages. Private Equity transaction volume has dropped for the last four quarters and from speaking to approximately 120 Private Equity clients in Q4 across the General Partner and Limited Partner landscapes, we expect a number of trends to play out in 2023:   

Mid-cycle strategic replacements   

As exit activity slows and funds are forced to spend more time on their existing portfolio companies, we expect there to be heightened pressure on leadership teams of portfolio companies, especially where operating performance is struggling in a challenging macro environment. As a result, we expect to see a spike in mid-ownership replacements, as opposed to the traditional entry/exit point hiring seen during the most recent cycle – as a practice we are experiencing this with 24% of our Q4 mandates being mid-cycle replacements.  

Package increases for experienced PE executives   

Always in short supply, there will be increased demand for seasoned PE-operating professionals as funds seek to enhance company performance through hands-on ownership. Package increases will become important not just for underperforming portfolio companies, but also performing ones that have been acquired at high multiples prior to the market correction. PE firms will be dealing with a ‘new normal’ valuation environment, and so portfolio companies acquired at the peak of the market will need to pay more to acquire the best talent to deliver on their investment cases. In 2022, we’ve seen an average increase of 13% cash compensation across C-suite hires.   

Increased disposal of non-core assets from large cap PE funds    

As companies seek to improve operating performance and come under pressure from investors, we expect to see disposal of non-core business lines and an increase in carve-out activity. This will drive large and mid-cap PE deal flow. We also expect portfolio companies of PE firms to aggressively target accretive M&A as a means to reduce implied entry multiples of platforms acquired at a late stage in the cycle.   

Increase in volume of co-invest transactions    

Given higher interest rates and a tougher financing environment, it is difficult to finance a buyout with debt of more than 50%, and hence there is an increased need for equity financing. Off the back of this, we expect to see an increase in Limited Partner co-investment, particularly within the large-cap space, as PE firms seek to use co-investment as a tool to plug equity funding gaps and de-risk positions.   

Increase in continuation funds and transactions   

With downward pressure on valuations and a difference in buyer-seller expectations, record levels of dry powder for secondaries ($94 billion) [source] following a hot fundraising environment, and investor demands for liquidity, we expect to see PE firms increasingly turn to continuation vehicles as a means of offering liquidity to investors, whilst also allowing themselves to hold stronger performing portfolio companies for longer.    

If you would like to know more, please get in touch with olly.wakefield@lafosse.com.