Green Capex toward Net Zero, infrastructure and clean water vs. 2016-19 annual global capital investment
Green Capex requirement to 2030 to support Net Zero, infrastructure and clean water pathways
Annual Capital Investment in Global Energy Transition
Aggregate capital raised by private equity funds closed by primary geographic focus, 2017 – Q3 2022, $ billion
Source: Preqin Global Report 2023: Private Equity
Private Equity funds raised ~$405bn through to Q3-22 ($540bn annualized), marking a steep decline from a 2021 high of $696bn, indicative of the dwindling appetite from LPs to commit new capital in the face of higher inflation and resulting interest rate hikes from central banks globally.
North American-focused funds proved to be the most resilient, recording just an 8.5% drop from the prior year on an annualized basis.
APAC recorded the steepest decline (56% on an annualized basis), driven by notable risk aversion towards China-focused funds as a structural slowdown in China’s residential property market and lockdown measures started a continuous decline in fundraising activity from Q4-21 onwards.
Private equity historic and forecast fundraising by region, 2017 – 2027F $ billion
Source: Preqin Global Report 2023: Private Equity
Private equity fundraising faces a challenging outlook over the short term.
Devalued public equities and fixed investments are already reducing overall portfolio value, thereby pushing private equity allocations closer to, or sometimes over, target levels, better known as the denominator effect.
As such, following a 34% jump in global private equity fundraising to $562bn in 2021, 2022F was anticipated to decline 21.5%, followed by a 2.7% decline in 2023F.
Modest growth in private equity fundraising is expected in the medium term, owing to a “higher for longer” interest rate environment as a result of persistent. inflation
Forecast increases in private equity fundraising in 2026F and 2027F are largely driven by North America, which is predicted to make up 70% of total funds raised by 2027F, up from 60% in 2021.
Annual aggregate value of private equity-backed deals by investment type, 2017 – Q3 2022 ($ billion)
Source: Preqin Global Report 2023: Private Equity
Every quarter of 2022 saw a decrease in private equity deal activity. On an annualized basis, deal values were behind 2021 by c.26%, whilst deal volumes were c.10% lower.
The larger decline in aggregate deal value was partly driven by increased borrowing costs amid a higher inflationary environment, which has suppressed valuations and reduced the number of ‘big ticket’ transactions, which typically use higher leverage.
As a result, the LBO market has been particularly badly impacted, with deal values falling to just $134bn in the 3 quarters to Sep-22 ($179bn annualized), representing a 44% drop off from the previous high set in 2021.
Annual aggregate value of private equity-backed deals by region, 2017 – Q3 2022 ($ billion)
Source: Preqin Global Report 2023: Private Equity
Regionally, Europe experienced the biggest decline in deal value, with a 49% drop off to Q3-22 on an annualized basis compared to 2021, followed by North America, where deal values declined 29%.
Deal activity has been adversely impacted in Europe by the uncertainty stemming from the Russia-Ukraine war in addition to volatility in sovereign debt markets in both the UK and Italy.
Total deal value reached $61.1bn in Asia by Q3-22, a 21% drop off from 2021 on an annualized basis. The shortfall was primarily driven by the Chinese market, linked to a pullback of US institutional investors following increasing geopolitical tensions and China’s zero COVID policy, which negatively impacted economic growth.
Deal values in the Middle East (captured as part of the RoW) hit $12.3bn in the first three quarters of 2022, higher than any single year historically, primarily due to sustained higher oil prices, which fueled capital deployment.
Annual value of private equity-backed exits by region, 2017 – Q3 2022 ($ billion)
Source: Preqin Global Report 2023: Private Equity
The value of private equity exits declined by 44.7% on an annualized basis in the first nine months of 2022. The aggregate number of exits also declined to 1,360 (or to 1,813, on an annualized basis), significantly lower than pre-pandemic levels.
North American private equity-backed exits declined 56% to Q3-22 on an annualized basis, whilst European private equity-backed exits also declined rapidly to $67.9bn, or $90.5bn (48%) on an annualized basis.
The decline is partly attributable to the relatively low-cost debt that private equity-backed businesses are sat on, which would likely need to be refinanced on a change of control, causing disparages between sell-side and buy-side valuations.
Increasingly GPs appear to be choosing to delay exits and place more focus on active asset management strategies to drive value-creation in the face of higher inflation and increased borrowing costs.
Annual number of private equity-backed exits by type, 2017 – Q3 2022
Source: Preqin Global Report 2023: Private Equity
A downturn in public equity markets contributed to a tougher exit environment in the 9 months to Q3-22, which saw a significant drop off in the IPO market, with the total number of IPOs in Q3-22 falling to the lowest level recorded since 2008/
Secondary buy-outs also performed poorly in the three quarters to Q3-22, declining 45% on an annualized basis to $541 bn, mostly driven by increases in the cost of borrowing, with secondary buy-outs typically more sensitive to debt markets as a result of using higher leverage.
Trade sales declined a comparatively modest 29% on an annualized basis to $1.2bn, which are typically less sensitive to debt costs as strategic players found opportunities to capitalise on declining valuations.
Average time spent in market by funds closed, 2017 – Q3 2022
Source: Preqin Global Report 2023: Private Equity
As of Q3-22, there were more than 3,185 funds raised with an aggregate capital target of $1.2tn.
Despite tougher macroeconomic conditions in the face of higher inflation and resulting interest rate increases, GPs, on average, raised 16% more capital than targeted in the 9 months to Q3-22, higher than each of the 5 preceding years.
However, average time fundraising also increased significantly, up 23.5% to 21 months in Q3-22, indicative of an increasingly competitive fundraising market as LPs reconsider capital allocations.
This trend is expected to continue in the short term, which may lead to extended fund periods and a continued focus on active asset management to drive value creation and improved returns.
Average private equity fund size ($m): first-time vs. experienced fund managers, 2015 – Q3 2022
Source: Preqin Global Report 2023: Private Equity
Additionally, the 9 months to Q3-22 saw a notable shift towards experienced fund managers, with the average fund size increasing from $718m in 2022 to $1,051m in Q3-22.
Comparatively, the average fund size for first-time managers decreased from $410m to $304m, indicating an appetite amongst LPs to allocate commitment to more established players.
A record low number of new managers joining the market is also a driver of the decline and suggests we may start to see a trend of consolidation in 2023, whereby smaller managers struggling to make their mark are picked up by larger and more established competitors.
Private equity assets under management by primary region of focus, 2017 – 2027F, ($ billion)
Source: Preqin Global Report 2023: Private Equity
Private equity AUM grew at a 14.5% CAGR between 2017 and 2021, which is forecast to slow to 10.2% CAGR over the following 6 years to 2027F, largely driven by a higher interest rate environment, which is expected to persist over the medium-term.
Higher interest rates will continue to challenge LP capital allocations, both through the denominator effect, but also in increasing appetite for fixed-income investments.
Despite this, global private equity AUM is expected to reach $7.6tn in 2027F, largely driven by growth in North America which is forecasted to make up 63% of global private equity AUM.
Global private equity assets under management by sub-strategy, 2017 – 2027F, ($ billion)
Source: Preqin Global Report 2023: Private Equity
Buyout strategies are anticipated to continue to dominate private equity in the medium term, forecasted to reach $4.9tn by 2027F, up from $3tn in 2021, representative of a 63% increase and 8.8% CAGR.
However, this is just over half the 15.4% CAGR recorded between 2017 and 2021, which was driven by a low-interest rate environment, which typically has a more pronounced impact on buyout strategies due to an increased use of leverage.
Partly as a result of the slowdown in buyout strategies, growth private equity is forecast to make up an increasing share of global AUM, reaching 2027F, increasing from $775bn in 2021 to $1.8tn in 2027F (24% of total AUM), representative of a 15.5% CAGR.
Private equity secondaries assets under management, 2017 – March 2022 ($ billion)
Source: Preqin Global Report 2023: Private Equity
Increased attention is being paid to the private equity secondaries market, which continues to be considered an attractive investment proposition by investors, as public equity and bond markets continue to sell off.
As of the end of 2021, secondaries’ AUM accounted for 5.7% of total private equity AUM, with $250m of unrealized value at that date, increasing to $257bn at Mar-22.
With some investors struggling with the denominator effect, we expect to see secondaries activity continue, as LPs look to rebalance their capital allocations.
Additionally, an increasing number of GPs are likely to utilize continuation fund vehicles to prolong fund lives and delay exits until more favorable market conditions prevail.
Global private equity secondaries fundraising, 2017 – Q3 2022 ($ billion)
Source: Preqin Global Report 2023: Private Equity
Global private equity secondaries fundraising remained broadly flat in 2022, reaching $37bn on an annualized basis. However, this marks a significant decrease from the peak of $79 billion in 2020.
The secondaries fundraising outlook looks positive, as we expect strong demand from LPs seeking to take advantage of the the supply of fund stakes available in the market from invested LPs that are looking to rebalance portfolios, which may result in decreased valuation expectations.
Despite this, there is currently a limited pipeline of secondaries funds that are fundraising, which could pave the way for new GPs to enter the market. However, higher interest rates will continue to create headwinds across private equity fundraising.
Private equity buyout deals entry EV/EBITDA median vs public indices, 2017 – Q3 2022
Source: Preqin Global Report 2023: Private Equity
Increased attention is being paid to the private equity secondaries market, which continues to be considered an attractive investment proposition by investors, as public equity and bond markets continue to sell off.
As of the end of 2021, secondaries’ AUM accounted for 5.7% of total private equity AUM, with $250m of unrealized value at that date, increasing to $257bn at Mar-22.
With some investors struggling with the denominator effect, we expect to see secondaries activity continue, as LPs look to rebalance their capital allocations.
Additionally, an increasing number of GPs are likely to utilize continuation fund vehicles to prolong fund lives and delay exits until more favorable market conditions prevail.
Regional private equity historic and forecast performance by sub-strategy
Source: Preqin Global Report 2023: Private Equity
Private equity investor views on portfolio company/asset pricing
Source: Preqin Global Report 2023: Private Equity
Investor views on where we are in global market cycles
Source: Preqin Global Report 2023: Private Equity
Unlisted energy funds closed by type
Unlisted energy funds in market by type, Q3 2022
Investment in Energy Transition
Global investment in sustainable technologies ($ Bn)
According to BNEF, global investments in the clean energy transition hit $1.0 trillion in 2022, the first time that annual investment in sustainable technologies hit the $1.0 trillion mark. Although the amount represents a 31% jump from 2021, it’s still significantly below the level required to meet net-zero emissions by 2050.
In terms of technology, the majority of the investments in clean energy were driven by solar and wind, reaching $495bn, a 17% increase from 2021. Electric vehicles follow closely with $466bn in investment, marking a 54% increase over the previous year.
Nearly half of all global sustainable technology capital was deployed in China, which continues to establish itself as a leader in the energy transition. China was closely followed by the European Union and the United States, recording $180bn and $141bn of investment, respectively.
In 2022, US renewable energy growth slumped due to rising costs and project delays driven by supply chain disruption, trade policy uncertainty, inflation, increasing interest rates, and interconnection delays. But growth will likely accelerate, driven by robust demand and the record-breaking raft of clean energy incentives in the Inflation Reduction Act (IRA), announced in August 2022.
The EU saw a remarkable acceleration in the energy transition, driven in part by the energy crisis, with record renewable energy installations and electric vehicle sales. The outlook for energy transition investment remains positive, with the continuation of country-led incentive schemes for renewable energy and the RePowerEU initiative, which will mobilise c.€300 bn in grants and loans to promote clean energy and energy efficiency.
Climate-related target count by sector, 2017 – H2 2022
The energy transition is sprawling across every sector of the economy despite many practical hurdles associated with such a significant global switch, including uncertainty about business models heavily reliant on government subsidies.
However, investors are finding the energy transition space increasingly attractive. Between 2017 and the first half of 2022 buyout and growth equity funds had closed energy transition-related deals with a total reported value of around $160bn. Although, the focus of private equity was primarily on the energy transition and clean industries segments, carbon tech is also gaining momentum.
Instead of only increasing broad exposure to the energy transition, funds are investing with a clear strategy based on risk and tactics.
Number of companies by EcoVadis carbon maturity score
While energy transition is opening new areas for investment, it is also generating new risks and imperatives for PE portfolios. Between the demands of regulators, limited partners, lenders, and customers, demonstrable efforts to decarbonize are increasingly becoming table stakes for PE investment.
Investors and regulators are demanding that companies establish clear emissions-reduction strategies that adhere to the standards and reporting protocols established by organizations like the SBTi and CDP. In this regard, the pressure on portfolio companies to transition to net zero constitutes a real risk for GPs.
Private companies have faced less pressure to adopt carbon-reduction strategies than public peers, which is evident as 53% of large public companies achieved top scores for carbon management, while the comparable figure for large private companies is 35%.
Private Equity Investment in Energy Transition – Risk Analysis
The right investment play depends on a fund’s appetite for risk and capital intensity, as well as its value-creation focus
Global investment in renewable energy ($ Bn)
Global investment in clean energy by technology (2022)
Global Investment in Clean Energy by Region (2022)
Investment in renewable energy reached a historic high in 2022, approaching half a trillion dollars for the first time.
The majority of investments were made in solar, marking a year-on-year jump of 36%, and equating to approximately $308 billion, which funded new capacity of 260GW.
Investment in wind remained broadly flat at $175 billion, partly hampered by instances of procedural delays in terms of securing permissions and grid connections in both Europe and North America, which dampened investor appetite.
China remains the leading investor globally, accounting for 55% of total renewables investments followed by the US and Europe with $50 billion and $39 billion in investments, respectively.
Cumulative investment need to meet sustainability goal 2016 – 2050 ($ Tn)
An estimated cumulative investment of $110 Tn in energy transition will be required to reach net zero by 2050 and meet the goals set out in the Paris Agreement
Given the capital requirement, private investment is expected to play a major role, anticipated to account for three-quarters of the overall capital spend, with governments providing the residual 25%
Although the private sector is to play a significant role in decarbonisation, government support for energy transition technologies will be crucial in ensuring targets set out in the Paris Agreement are adhered to
Number of companies by EcoVadis carbon maturity score
The clean technology industry is entering a stage of maturity, following a decade of failures that resulted in energy-related VCs losing approximately $12.5 bn
As clean technology becomes more economically viable, new business models are attracting private investments into the sector. Consequently, annual investment into the sector is expected to grow more than 3x to $1tn annually in the next five years, up from the current $300 Bn currently
A combination of factors, such as a favourable regulatory environment and the high growth potential of specific technologies such as electric mobility and energy storage, are catalysing private investment into the clean technology sector