Three reasons private equity dealmaking will rebound in 2023

6 April 2023

There are many reasons to be optimistic about a rebound in private equity dealmaking, particularly in the second half of 2023, says Tom Amster, Global Head of Financial Sponsors at Macquarie Capital. Despite current market headwinds, there are various factors that are likely to spur private equity (PE) activity later this year. In this article, Tom identifies signs that the market is recovering from a challenging 2022 and highlights why he believes that PE houses will be able to take advantage of a range of deal and financing opportunities in 2023.

1. Record levels of dry powder and pressure from LPs to return capital

There was a marked lull in market activity in the second half of 2022, caused by a mix of macro uncertainty, inflation, rising interest rates and frozen debt markets. The leveraged buyout market was hit especially hard by a doubling of borrowing rates.

While fourth quarter PE deal volume declined by 22 per cent against the previous 12 months1, there are hopes for a recovery in 2023. Pressure from LPs to return capital should fuel PE deals, particularly as dry powder remains at record levels, with an estimated $US1.25 trillion globally2. For example, three firms alone – Blackstone, Thoma Bravo, and Advent International Corp. hold more than $US100 billion in uninvested capital3.


Why it matters

Financial sponsors are recyclers of capital – not capital storage companies. While dry powder alone does not provide an immediate impetus for deploying capital, as LPs start requiring a return of capital in order to commit new capital, we expect a valuation reconciliation to be achieved and for the M&A markets to return to a more normalised cadence. In the interim, we expect to see capital continue to flow to portfolio add-on acquisitions where many sponsors see better relative value as well as a more welcoming add-on financing market.

Encouragingly, those sponsors that have recently closed funds should be emboldened by the knowledge that the best fund vintages typically follow market dislocations. With that backdrop, we expect financial sponsors to be more creative in deploying reserves, as we outline below.”                                                         

2. Greater options for capital deployment

Due to the high cost of debt and the corresponding implied impact of higher interest rates on valuations, control leveraged buyouts of private companies are likely to be fewer than in the heyday of 2021. Still, this won’t shut down dealmaking. There are many other opportunities for PE firms to enhance their portfolios.

We expect take-private transactions to be a feature of the 2023 market as PE firms take advantage of stock market volatility and invest in public companies at a significant discount to their peak valuations. Taking a company private provides an avenue for PE firms to invest in strong players at mark-to-market valuations, while valuations of already-private companies have not adjusted to the new market reality.

Another capital deployment and return strategy we expect to accelerate is sponsor-to sponsor minority sales. These deals don't require financing or trip change of control provisions. Selling minority stakes also allows sponsors to demonstrate to LPs that they are generating value by achieving a higher price than when the asset was acquired, but still retaining the upside of future value appreciation.

There will also be growing interest for PE buyers in corporate carve-outs as public valuations drop and management teams look to streamline their assets, shore up their balance sheets and ‘unleash value’4.

And finally, while the economic climate is likely to increase pressure on many portfolio companies, we don’t expect this pressure to lead to a surge in distressed credits. Covenant-lite capital structures will provide sponsors more time and flexibility to address performance. Instead of distressed deals, we expect to see more opportunities for preferred/structured equity transactions. This ‘reinforcement capital’ will be received by some financial sponsors and be provided by others. At the same time, it will shore up portfolio company balance sheets while allowing existing owners to avoid having to inject new equity into old investments. Just recently, Macquarie Capital provided $US62.5 million of preferred equity to Future Fiber (doing business as GoNetSpeed), a rapidly growing fibre-to-home platform backed by Oak Hill Capital. Macquarie Capital’s investment represents 50 per cent of a $US125 million total investments, with the remaining 50 per cent provided by Ares Management.


Why it matters

The disconnect between sellers looking for 2021 prices versus buyers seeking perceived lower 2023 valuations has created a period of inertia, forcing financial sponsors, in the short term, to find creative ways to deploy and return capital. As sellers realise that holding out for 2021 valuations is not a viable long-term strategy, we expect to see a marked increase in deal activity in the second half of 2023.

This increase in deal activity should be felt across all markets, and be even more noticeable in key industry sectors such as software & services and healthcare. Software, for example, has demonstrated impressive resilience through market volatility. Healthcare, too, has proven to be a dynamic investment segment for the PE community as technology, regulation and an aging global population have all driven dramatic change and corresponding investment opportunities. Macquarie Capital continues to expand its coverage in these areas, adding experienced Managing Directors to its Software & Services and Healthcare teams to support this expected increase in deal activity.

3. Direct and syndicated lending will evolve and converge

Despite facing a challenging climate for financing, there are still options to support deals. While the syndicated lending market has slowed significantly, rumours of its demise are greatly exaggerated. Outstanding 2022 commitments are being steadily cleared from banks’ balance sheets, and similar to the pressure on private equity funds to deploy capital, we expect pressure to increase on leveraged credit investors to deploy capital. In the interim, the direct lending market has stepped in to partially fill the void.


Why it matters

Direct lending continues to capture market share, offering relatively favourable terms, reliability and speed of execution. In 2022, private debt accounted for around one third of all financing for PE deals.5

An abundance of private credit has maintained deal flow and direct lenders have also been able to participate in larger deal sizes, like the $US4.5 billion unitranche loan in May 20226 that supported Hellman & Friedman’s acquisition of a majority stake in Information Resources. Sponsors and borrowers are increasingly looking for longer-term partnerships, and private credit solutions offer additional customisation, reliability and speed of execution. 

Many unitranche financings have been harder to complete as commitment sizes have been dramatically reduced. Sponsors have noted that deals that used to be allocated within five phone calls, now often require contacting dozens of direct lenders. Fortunately, the market has become significantly deeper, and larger syndicates writing smaller checks have allowed many deals to move forward.

Looking ahead, there is likely to be a convergence of syndicated lending and direct lending, with borrowers pivoting from one market to the other and terms converging across the two financing sources.

While 2022 was a tough year by many metrics, there are many positive factors in 2023 that point to a resurgence in the second half of the year for PE buyers and sellers alike.

At Macquarie Capital, we’re focused on providing world-class advice to financial sponsors and their portfolio companies. We’re also uniquely positioned to help realize new opportunities and service our clients’ debt needs with a range of capital solutions, including both our growing private credit platform and our established syndicated leveraged finance offering. Let us know how we can help you drive your business forward and find new opportunities to unlock value.

Tom Amster

Global Head of Financial Sponsors, Macquarie Capital

  1. WC, Private equity: US Deals 2023 outlook,
  2. Pitchbook, “Global Private Market Fundraising Report” 2022 Annual
  3. S&P Global Marketing Intelligence, Global private equity dry powder approaches $2 trillion, 21 December 2022,
  4. McKinsey & Company, The power of goodbye: How carve-outs can unleash value, 7 February 2023,
  5. EY, Private Equity Pulse: Give takeaways from 4Q 2022, 24 January 2023,
  6. Bloomberg, Blackstone Leads $4.5 Billion Unitranche Loan for H&F Buyout, 5 May 2022,

This article has been prepared by the Macquarie Capital Financial Sponsors team and is not a product of the Macquarie Research Department.