As one of the fastest and steadiest growing asset classes in the last couple of decades, private equity (PE) is undeniably one of the main drivers of transformation in capital markets.

Historically regarded as complementary to, rather than a competitor of the public market, private equity has in the more recent years been one of the sources of increased activity in the public capital market.

The special-purpose acquisition company (SPAC), a vehicle whose now fading popularity has until 2021 helped propel IPO activity in U.S. and Europe to record-high levels is a perfect example of how private equity shapes and drives activity in the public capital markets.

In brief, SPACs raise capital from investors via an initial public offering (IPO) and have two years to identify a suitable target to complete a business combination. The IPO proceeds are held in escrow until a suitable target is identified and investors in the SPAC approve the business combination. Shareholders who do not wish to participate in the business combination can redeem their shares in the SPAC and have their original investment returned by the SPAC.

The SPAC, which investors may well regard as a competitor for the PE asset class, was embraced by the PE industry and was over time integrated in the PE toolkit. Whether by incorporating SPACs in their fund-raising strategies, using a de-SPAC business combination as an alternative exit route or supporting de-SPAC transactions via so-called private investment in public equity (PIPE) deals, the PE industry’s reaction to the SPAC trend was proof of the industry’s synergies with the public markets.

Due to its standing ties with the PE industry, Luxembourg was one of the prodigy jurisdictions for SPAC activity in Europe. While the trend lasted, PE-backed SPACs helped Luxembourg secure a spot on the SPAC map.

As the public markets are facing increased volatility on the back of the global health and political context, the SPAC trend is fading and IPO activity is reported to have experienced a slowdown in 2022.

Against this background, it is difficult to predict what will emerge as a new trend in the capital market and what role will the PE industry play in that regard. Nonetheless, drawing on the PE industry’s resilience over the past two years and taking into account the high volume of dry powder reported to be available in the PE asset class, we can expect the PE industry to continue to drive activity in the public market and creatively leverage on opportunities created by uncertainty and volatile prices.

Public targets will likely be seeking for alternative means to return value to investors, other than by market price. On the other hand, the fall in share prices may provide PE firms with investment opportunities in high-quality undervalued targets.

With public-to-private deal numbers on the rise and PE firms still ready to deploy a significant amount of capital, the PE industry is set to have a say in how the capital market activity will look like in the coming years.