Private Equity Valuations: Q3 2023 Summary

Posted May 24, 2023

Our analysts have compiled publicly available information about PE valuations as of Q3 2023, including the industries with the most deal activity and highest deal value. The chart below identifies overall trends in PE activity, illustrating the total value of all deals as well as the total number of deals across all industries between Q1 2020 and Q2 2023.

Private Equity Valuations – Q3 2023

The sections below dive deeper into private equity valuations in Q3 2023, discussing the conditions that led to the moderate increases in deal value since they hit a low one year earlier. We also provide an analysis of the conditions owners of private companies will find themselves in when negotiating with PE firms in the second half of 2023.

PE Activity Trends Q3 2023

PE saw a substantial slowdown in H2 2022-H1 2023 with 17% fewer deals across all industries and 27% lower valuation multiples compared to the previous period. S&P Global Market Intelligence data suggest that the majority of these challenges came from “misalignment between buyer and seller,” meaning buyers came into the M&A process believing their company should be valued closer to where it was 18 months prior rather than adjusting to the current realities of the market. There was also a lower appetite for risk on the part of PE firms given rising interest rates and deflated consumer confidence.

Most PE deal activity appears to have taken place within the tech sector, which is typical, and tech’s share of deal activity has remained relatively constant throughout the economic downturn. PE’s continued interest in tech in Q3 2023 isn’t surprising, given the sector’s earning potential and concurrent boom in generative AI and clean energy technology.

Private Equity Activity by Sector – Q2 2023

Based on this data, the lower volume and value of PE deals isn’t likely to last more than another 2-3 quarters. Several sources indicate a historically large amount of “dry powder” (funds allocated for the purposes of acquiring companies but not yet committed) in PE firms. Current estimates on the total amount vacillate between $2-3.5T, with industry giant Blackstone alone holding ~$44B.

While all that excess capital combined with a pause in rising interest rates points to an active H2 2023, valuation multiples aren’t likely to rise substantially for at least a year given PE firms’ continued inability to hold too much debt.

PE Valuation Multiples by Industry (EBITDA)

However, the PE capital allocated in the latter half of 2023 may flow to a few new sectors. A survey taken by ~200 PE firms suggests an increased interest in traditional service businesses such as wealth management, consulting, and home services, creating a “long tail” of disparate business targets in addition to the mainstay of tech.

Predicted High-Performing Sectors in Private Equity – H2 2023

What Do These Trends Mean?

Between a settling economy and the large amount of cash waiting to be utilized, the private equity M&A environment in Q3 2023 is complicated. Here are our predictions:

Interest rates will continue to drive multiples down, but only slightly. Because PE firms often engage in leveraged buyouts that rely on a large amount of debt, much of their existing dry powder will have to be utilized to manage that debt rather than offering higher payouts. However, the relatively sparser deal flow over the last year, as both private companies and PE firms watched macroeconomic conditions, has created a latent appetite for new deals.
“Recession-proof” sectors will be more favorable. Macroeconomic instability over the last year has made PE firms less likely to acquire companies that could be easily affected by further downturn. Healthcare, energy, and consumer essentials are more likely to be targeted by PE due to their consistency in the face of previous economic crisis.
Flexible deal structures will continue until the economy restabilizes. Inflation has affected many companies’ profit margins over the last year, making them less attractive to PE firms. As a result, flexible deal structures (e.g., distressed M&A, asset sales, PIPE investments) are likely to take a larger share of PE activity over H2 2023.