It is interesting where private equity professionals’ heads are at in terms of the market heading into this year. Some deal pros are pessimistic about dealmaking, Affinity co-founder and co-CEO, Ray Zhou is more optimistic.
The current environment along with cheaper valuations will leave dealmakers with a lot of opportunities for M&A transactions, Zhou explains. He expects private equity firms to take advantage of cheaper companies in the battered public markets and late-stage private markets. One example is Thoma Bravo’s $8B acquisition of Coupa.
However, there are some caveats. “Looking at the broader private equity universe, we will see investors chasing a more select group of companies as investors continue to tighten their investment criteria,” says Zhou. “These investors will continue to take fewer bets on unproven businesses and business models, opting instead for companies with strong fundamentals and valuing efficiency over growth. It will be a competitive environment with fewer attractive deals to choose from. Valuations will also continue to come down across the board.”
Zhou adds some of the trends he has noticed through the Affinity platform. In a recent survey conducted by the Affinity platform, 39 percent of respondents explain that in 2023 they plan to spend most of their time focused on deal sourcing. While 23 percent say they would dedicate the most time to portfolio support. This means that investors are interested in resetting their portfolios away from startups in sectors that are performing poorly, says Zhou.
Investors are facing a reluctance to deploy capital, but also feel pressure to continue increased deal activity going into 2023.
Zhou says that “investors are looking to reset their portfolios with better investments that meet their firm’s new criteria, resulting in better-quality investments. There has also been a move of interest and capital out of the growth stage, where valuations have collapsed, and positive outcomes are limited in the short-term, into early-stage startups.”
Zhou illustrates this point through the increase in new deals, which are that are up 69 percent since 2021, that entered deal flow in the Affinity Relationship Intelligence platform. He also notes the increase in the size of investors’ people networks.
Where do you think private equity dealmaking is heading in 2023. Let me know at [email protected].