Invest Europe has published its Pan-European Market Sentiment Survey 2023, conducted in partnership with global management consultancy firm, Arthur D. Little, focusing on the private equity industry.
The firm writes that the survey provides a unique view of the private equity (PE) industry through a holistic assessment of current sentiment, with insight collected from both General Partners (GPs – investment funds) and Limited Partnerships (LPs – pension funds, institutional investors (such as banks, and insurers), and all other investors in private equity.
The firm writes that by combining this sentiment assessment with Invest Europe’s proprietary data, the survey provides an in-depth understanding of the state of the PE market. Given the industry’s key role in financing European business, it therefore provides a unique view of the wider economy, now and in the future.
Based on responses from Invest Europe’s members, who together manage EUR846 billion in assets, the fourth annual survey found a mix of negative and positive sentiment:
Fund raising has slowed considerably since last year and expectations for the next 12-month period are weak although with improvements since last year. “However, it appears that the worst is behind us, with PE firms beginning to reach out when raising new capital.
Investments have declined in both number and value, and PE investors are less positive about the future investment climate.”
Expectations on portfolio company divestments are uncertain, but with improvements since last year.
High interest rates and inflation are hampering the development of existing portfolio companies managed by private equity operations.
However, there are clear bright spots for PE market development, especially around three areas:
ESG issues are top of the agenda for PE funds, their investments and operations. PE funds are likely to be required to have dedicated resources for managing these new requirements in terms of control and reporting.
PE firms are showing great dedication to continuously developing their portfolio companies. Currently they are prioritising obvious value growth levers such as organic and inorganic growth as well as digitalization of operations.
Finally, the most important factor for the future of the PE industry is that dry powder levels (capital available to be invested in target companies) are at record highs. In Europe this amounts to around EUR350 billion or 35 per cent of capital raised. Assuming that PE firms meet the agreed upon terms of their funds, this is expected to be spent on investments in target companies over the next five to seven years. Available capital may well grow more as new fundraising is unlikely to stop entirely.
In summary, the firm writes that while the market is presently weak, trends point towards improvements in the next 12 months. “The market is at a turning point for the better, with the current weak situation likely to be just a blip in the long-term positive development of the PE industry. This is because the PE model is strong and offers good value creation opportunities for investors over time. Investors and the industry just need to have patience for the market to come back to its previously very active levels.”
