Private Equity Funds Regroup as Debt Financing Dries Up

Private equity funds are seeking new ways to close deals as debt financing becomes scarce.

That’s according to a Thursday (Dec. 22) report from Reuters, which notes a 40.4% decline in worldwide buyout activity, caused by a lack of debt financing, which was itself due to higher interest rates and reluctant lenders.

Leveraged buyouts had fallen 23.3% as of Dec. 14 compared to the same period last year, Reuters said, citing data from Refinitv, while the overall value of transactions has dropped by 40.4%. Global dealmaking has fallen 37% this year after reaching a record $5.9 trillion in 2021.

“The first quarter of 2023 is going to be relatively slow from a sort of M&A and financing front,” said Uday Malhotra, co-head of leveraged finance and loans for Europe, the Middle East and Africa (EMEA) for Citi.

“[But] private equity funds still have significant amounts of dry powder, and by the second half of next year, they will be looking to put some of it to work,” he said.

This news follows reports from earlier this week that tech startups were looking for new finance methods as capital dries up.

“Everyone is taking corrective action,” one Silicon Valley investor told the Financial Times.

Among the companies seeking alternative financing is the delivery app Gopuff, which raised a $1 billion convertible note in March, following a $1.5 billion convertible note last year.

However, these deals “kick the can down the road,” Chris Evdaimon, a private companies investor at Baillie Gifford, told FT. “They are mostly being led by existing investors who are saying we also don’t want to get into this unpleasant valuation discussion right now.”

The lack of funding has led to a drop in initial public offerings (IPOs) this year, as deals have fallen to levels not seen since the 2008 financial crisis. Just $207 billion has been raised from IPOs in 2022, down 68% from last year.

Meanwhile, research by PYMNTS showed that next year will not be a good one for FinTechs that wish to go public via special purpose acquisition company (SPAC) mergers.

Our data showed the pace of SPAC deals falling to the low-single-digits in most sectors, particularly in the payments, shopping, and work-related verticals.

This problem isn’t just confined to Silicon Valley. A recent report from London-based venture capital firm Atomico found the total value of public and private tech companies in Europe fell from $3.1 trillion in late 2021 to $2.7 trillion this year.

Atomico found that venture capital funding in the sector has declined by 18%. It also noted that 82% of founders surveyed said it was it harder to raise venture capital versus 12 months ago.

“This is, by some margin, the biggest change in founder sentiment on the fundraising environment that we have recorded over the past five years of surveying the ecosystem,” the report said.