Buyers and Sellers Face Different Realities in Private Equity

The same challenges – inflation, interest rates, economic uncertainty – that have plagued nearly every aspect of the financial world, are positioning an interesting year ahead for private equity. As central banks raise interest rates in an attempt to curb inflation, borrowing money is more expensive than it has been in years, making buyers more hesitant to commit to new deals.

According to Ernst & Young, completed PE deals fell by 67% in the third quarter of 2022 when compared to the prior year. There is no singular root cause of this steep decline, instead, it’s produced by lower valuations and a disconnect in price expectations between buyers and sellers.

A few years ago, when interest rates were low, sellers could get by with massive price tags on the sale, but now, buyers have to factor in the increased cost of financing deals, reducing their overall price tolerance. This disconnect will take time to reconcile; though there are plenty of buyers available and plenty of sales to make, until sellers lower their expectations, the PE market will continue moving at a slow pace.

M&A expert, Anthony Bahr, discussed his perspective in a Forbes article. This year, he has seen many deals fully negotiated with signed letters of intent that end up falling through during the 90-day deep dive of the organization’s financials. He believes that this largely comes down to a mindset shift for sellers; buyers still have plenty of cash to close deals, but sellers need to adjust their expectations going into 2023.

The market is entering a new era, there’s no doubt about that. However, there is still plenty of opportunity and room for expansion. 2023 will likely usher in new baseline ideas about what both sides can expect when closing these deals; once achieved, the industry will likely see a major increase in successful deals.