WSJ Pro Special Report: The Year Ahead By Laura Kreutzer
What a difference a year makes. At this time last year, few in private equity would have predicted the confluence of challenges that the investment world has faced in the past 12 months, including volatile swings in public stocks, rising inflation, Russia's invasion of Ukraine and its broader economic impact, and the recent freeze in the leveraged loan market, to name only a few.
As 2023 unfolds, private-equity firms enter what some predict will be one of the more challenging periods the industry has seen since the Covid-19 pandemic. Exactly how long this period will last and what unknown hurdles will emerge remain yet to be seen. However, it's clear that the challenges will create investment opportunities for firms with capital to deploy, even as they generate headwinds for portfolio companies that are wrestling with rising debt costs and a slowing economy.
Despite all of the uncertainty, general partners and limited partners both echo a common refrain that challenging economic times often lay the groundwork for future outperformance. While the industry will no doubt have to confront operational challenges and a more difficult fundraising landscape, many are also mindful of the opportunities that will no doubt emerge.
Read on for highlights from the issue. Download the entire report here .
Midmarket Deals to Revive M&A
The flurry of megadeals at the start of 2022 sputtered to a stop midway, caving to pressure from rising interest rates and a recessionary environment, Selin Bucak writes for WSJ Pro.
Market participants suggest the coming year may see some unlocking of deal making , especially in the buying and selling of companies valued below $500 million, or in the midmarket segment.
Big Number General Partners Face Fundraising Squeeze
Los Angeles City Employees' Retirement System was expected to commit $1.375 billion to private equity in 2022, but the actual amount when the figures are finalized will likely be between $1 billion and $1.1 billion. A further slowdown looks likely in 2023, writes Jennifer Rossa.
The change, outlined in a November investment committee agenda, shows how limited partners such as Lacers will commit less money per manager to fewer general partners in the coming year.
Managers seeking capital won't find markets completely closed, but they will face a tougher slog in 2023 , with more cautious investors favoring different strategies and demanding better terms.
Viewpoint: An ESG Playbook for Midmarket Companies
Private-equity firms increasingly must factor environmental, social and governance issues into their operations, both for fund managers and their portfolio companies, Gregory W. Brown writes. But simply applying the same ESG playbook used by large companies to smaller ones could end up causing as many problems as it solves.
He suggests a new framework to evaluate ESG priorities.
Quote Rising Specter of Distress
The higher cost of capital and an extended economic downturn could pose a double whammy for portfolio companies of private-equity funds, but the system is flush with cash that can help support distressed borrowers.
Higher borrowing costs are expected to limit leveraged-buyout deals targeted at portfolio holdings. Further, private-equity firms are expected to spend more on servicing existing debt rather than building out portfolio companies, lawyers and private-equity observers say.
This, combined with the economic downturn and high inflation, can place numerous stresses on borrowers, they said.
Read more .
Strategic Deal Making Slows Down
Add-on acquisitions that allow private-equity firms to pursue strategic deals of benefit to an existing portfolio company continued in 2022, but at a muted pace. Read more in the report.
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This article is a text version of a Wall Street Journal newsletter published earlier today.
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