Bloomberg Market Specialists Jess McConaghie, Ming Lee, Alison Hor, and Keith Gerstein contributed to this article. The data utilized is available on the Bloomberg Terminal.
Background
With debt being one source of capital leveraged to fund their deals, private equity firms’ actions in 2022 have dramatically cooled since the 2021 boom of M&As. As US private equity firms get ready for a potential deployment of capital that they seem to have been stockpiling for the 2022 and 2023 years, approaches can differ for their global counterparts. Utilization of debt for deals and strategic acquisitions can both in quantity and quality will result in a very different landscape in the upcoming year.
Issue
This Private Equity industry relies on opportunity. IPOs, M&A, Corporate buybacks, are all ways that the industry invests their capital and debt for financial growth.
North America
APO, like many of the PE firms this quarter, is looking to spend much larger portions of their dry powder on upcoming deals currently either pending or proposed. Dry powder figures for the upcoming 5 quarters are expected to fall exponentially, with Q1 2023 showing an estimate of $21.9 billion (less than half of this reported 2022 Q2 value). The deployment of this capital on hand highlights the quick unloading of cash-related securities and timid use of debt to fund transactions. With Apollo having a high Dry Powder to AUM ratio (second only to Blackstone) in Q2 2022, this points to huge fundraising successes for the company giving way for them to take advantage of new investments in H2. Large amounts of uncommitted capital paves way for Private Equity firms to capitalize on acquisitions where the big banks are forced to pull back on financing during times of inflation and higher interest rates.
With IPOs slowing in H1 2022, acquisitions by Private Equity companies had more opportunities but are experiencing slowdowns as well. In the US the value of IPOs are down 85%, EMEA 65% and in APAC 48%, showing the weakening of the market, and Private Equity’s moment of opportunity on the LEAG<go> table in the terminal. With both inflation and interest rates rising this year, an optimistic lead into 2022 has become relatively conservative for these Private Equity firms. M&A in Q1 2022 was the most active for Private Equity peer set APO, KKR, BX, CG, ARES, IEP, and BRDG, as they focused on technology and real estate companies in terms of both proposed and completed deals but have faced declines.
Asia Pacific
There is a more conservative investment strategy within APAC private equity. Looking at the Japan-based Softbank, the company adopts more defensive approaches in recent investments (NSN RBSNFVDWLU68). There were huge declines in the approved investment amounts at Vision Funds from USD 20.6 billion in 2021Q1 to only USD 0.6 billion in 2022Q1 which looks to set the pace through the remainder of the year (DOCV PRES WC000000002988951284). The adoption of the defensive approach is used to maintain financial discipline as Softbank had a net loss of 1.7 trillion yen in its latest fiscal year, starkly contrasted to street estimate of 573-billion-yen profit.
The global slump in the deal volume and count in 2022 further attested the cautious approach. As of August, Softbank only achieved approximately 46% of the deal count of 2021, and only about 26% of the deal volume (in JPY). This is despite the depreciating JPY which could have fueled increases in deal volume. Softbank is relatively more active than its North American counterparts in terms of completed deal count and volume, but the volume remains a far cry from previous frenzies, which also suggests the transaction size is smaller on average.
Tracking and measurements
Bloomberg functions allow for investors to use Company Financials MODL to track the current levels of debt for a company. For the 2022 Year End, Private Equity firm Blackstone expects to see increases in Dry Powder levels which can be used for future use, and increasing Capital Deployment for all business arms, except Private Equity. In the future, private equity companies may center on more secure investments where they believe cash flow will hold steady and the sector will remain attractive, as some American companies have begun to do. To track how brokers expect companies to store and deploy capital, utilize the {BX US Equity MODL<Go>} screen and select the ‘Annual’ period.
