As the global focus shifted from post-pandemic exhilaration to caution following macroeconomic tightening, conflict and inflation scares, the Private Equity (PE) industry followed suit, with fund managers factoring in a potential recession following closely on the heels of the recovery from the pandemic. H1 2022 witnessed a shift in investor sentiment as bearish sentiment began to overshadow H2 2021’s market euphoria, a prominent silver lining being more realistic valuations in general. The fund managers we surveyed were more conservative overall in H1 2022, with those dominant macro events (including the public market drawdown) observed so far in 2022 as the primary drivers for this sentiment.
During H1 2022, these investors prioritized portfolio management activities as businesses navigated challenging headwinds. Investor sentiment toward holding periods and distressed asset quality was largely similar to H2 2021, which portrayed neutral sentiment toward holding periods and more positive sentiment regarding distressed asset quality. In terms of deal flow, H1 2022 was slightly weaker than H2 2021, when comparing the volume and quality of inbound/outbound opportunities; however, U.S. Middle Market PEs anticipate an increased focus on deal origination in H2 2022, as they are expecting pipelines to improve gradually. On fundraising, securing Limited Partners’ (LP) allocations has been tough for emerging funds in H1 2022, according to a few respondents – especially as the LPs allocated their full annual amounts to re-ups in Q1 2022. In addition to rising interest rates, H1 2022’s extensive valuation cuts incited a hold on the formerly heated IPO and SPAC routes.
Our respondents foresee an overall bearish environment for H2 2022, as investor sentiment is expected to continue to decline but at a more arrested momentum compared to H1 2022.