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Private equity firms maintain return expectations despite slower deal flow

Private equity (PE) firms are standing firm on their return expectations despite the challenges presented by the current investment landscape, even as deal activity has experienced a slowdown. According to a recent survey by Churchill Asset Management, 81% of PE executives anticipate similar returns for new investments in 2023 as they did in the previous year. Only a small fraction, 3.2%, foresee lower returns. 

The survey, conducted among 95 PE firms that collaborate with Churchill, delved into topics such as M&A deal flow, return projections, strategies, and sector allocation shifts for 2023 compared to 2022. 

Jason Strife, Senior Managing Director and Head of Private Equity and Junior Capital at Churchill, acknowledged a moderation in valuations over the past couple of years, reflecting a correction in valuation multiples. However, despite this trend, PE firms anticipate that valuations will remain relatively stable year-over-year. 

A noteworthy trend is the prolonged holding of portfolio companies by PE managers. This is attributed to several factors, including the use of continuation funds to retain prized portfolio assets and a cautious approach due to uncertain interest rates and a sluggish M&A environment. Anne Philpott, Managing Director at Churchill, noted that the market is witnessing a shift towards add-on transactions, where PE sponsors acquire smaller companies to enhance existing platforms. 

Regarding the use of co-investments, 73.7% of PE firms indicated that the challenging investment climate has not led to changes in their approach. Limited partner relationships emerged as the primary consideration for co-investment decisions, followed by speed and the ability to offer committed equity financing. 

While the current market conditions have prompted some allocators to put new investments on hold, PE fund investors like Churchill have found opportunities. As the fundraising landscape becomes more challenging, there is a decline in competition from subscale co-investors, given reduced primary market flows. 

Churchill’s survey also revealed that despite the current lull, a significant majority (53.7%) of PE firms expect M&A activity to return to normalized levels by the first half of 2024, with 24.2% projecting a return to normalcy in the second half of the year. 

Read more: https://www.institutionalinvestor.com/article/2c11btwljeqkqzdzaf2f4/portfolio/private-equity-firms-return-expectations-remain-high-despite-m-a-slow-down 

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