Private equity, venture capital firms wary about deal-making, fundraising environment

Professionals at private equity and venture capital firms are cautious about deal-making activity and pessimistic about the state of fundraising this year, according to the S&P Global Market Intelligence 2023 Private Equity Outlook Survey, released on Thursday.

On the whole, some 24% of general partners expect deal activity to deteriorate this year, up from 7% in the prior year's survey; while 39% expect activity to improve, down from 56% in the prior survey. The percentage of GPs that expect deal activity to remain unchanged was the same for both years at 37%.

However, venture capital professionals were somewhat more optimistic about deal activity than their private equity counterparts.

By region, some 62% of private equity professionals in Middle East-Africa region expect deal activity to improve this year, while 57% in the Asia-Pacific region do. However, only 30% of private equity executives in North America and Europe expect to see improvements this year; while in Latin America, only 17% anticipate improvements.

Among venture capital firms, an improved climate for deal activity was expected by 60% in the Middle East-Africa region; 53% in Europe; 45% in North America; 44% in the Asia-Pacific region and 38% in Latin America.

However, most venture capital professionals think deal activity will improve in 2023, regardless of the size of their firms' assets under management. At venture capital firms with at least $500 million in AUM, 50% of respondents expect an improved deal climate this year, while at firms with AUM between $200 million and $500 million 54% do. At venture capital firms with less than $200 million in AUM, some 45% of respondents expected better deal activity.

With respect to fundraising, both private equity and venture capital professionals were quite pessimistic about this year. Some 45% of private equity respondents expect the fundraising climate to deteriorate this year, while 35% of venture capital executives do. These figures jumped from 12% and 15%, respectively, last year.

Moreover, about 40% of private equity respondents said they intend to modify their investment approach this year due to ongoing geopolitical tensions, particularly in Ukraine, while 46% of venture capital firms plan to change their investment strategies as a result of geopolitical crises.

Limited partners surveyed said private equity was the most attractive alternative asset class, followed by venture capital and real estate. Moreover, 43% of limited partners that are investing in private equity plan to increase their asset allocation. "This indicates a continued confidence in the potential returns and benefits that (private equity) can offer," S&P said.

This year's survey collected responses 246 private equity firms, 129 venture capital firms and 131 limited partners between Dec. 1 and Jan. 22.