This article is an extract from GTDT Market Intelligence Private Equity 2022. Click here for the full guide.


Global M&A deal volume and value measured in dollars fell considerably in the first half of 2022 from the historic levels seen throughout 2021. After a recovery from the covid-19 pandemic, the beginning of 2022 showed signs of slowdown, although not full stagnation, as inflation, political disturbances with Russia and rising interest rates provided for new challenges and uncertainties in the M&A market. M&A deal value reached US$2.2 trillion during the first half of 2022, a year-on-year decrease of 21 per cent, marking the slowest opening six months for M&A in two years. Even so, the second quarter of 2022 marked the eighth consecutive quarter to surpass US$1 trillion, an all-time record. Just over 26,700 deals were announced during the first half of 2022, a decrease of 17 per cent compared to year ago levels and a two-year low. Despite these trends, ‘mega-deals’ witnessed an increase during the first half of 2022, as 26 deals valued greater than US$10 billion totalled US$608.8 billion. This was an increase of 11 per cent as compared to the first half of 2021 and reached a three-year high. In the same period, worldwide M&A for deals valued between US$1 billion and US$5 billion decreased 35 per cent as compared to a year ago, totalling just over $560 billion. The technology sector accounted for a record 25 per cent of global deal value and reached US$531.1 billion during the first half of 2022, an overall 19 per cent decrease in total value and a 20 per cent drop in volume as compared to the first half of 2021. Cross-border M&A activity reached US$686.8 billion during the first half of 2022, representing a 17 per cent decrease compared to 2021 and the slowest cross-border first half for M&A since 2020. The technology, financial and industrial sectors contributed 42 per cent of all cross-border M&A activity, a decrease from 46 per cent during the first half of 2021. The volume and value of private equity-backed buyout deals increased just one per cent during the first half of 2022 across nearly 5,900 deals worth a total of US$552.8 billion globally. Approximately 26 per cent of M&A activity consisted of private equity-backed buyouts during this period (all of the above data provided by Refinitiv). On the sell side, US private equity-backed exit activity saw a large drop-off compared to 2021, especially public listings. Only US$3.4 billion in private equity-led initial public offerings (IPOs) have occurred so far in 2022, after seeing US$272 billion in private equity-backed public listing exit value in 2021, a record year. In the United States, fundraising activity by private equity funds started slow out of the gates, but after a Q2 rebound, raised more than half of last year’s total, with US$176 billion committed across 191 funds (PitchBook data).

Americas

Announced M&A deal value during the first half of 2022 in the Americas totalled approximately US$1.37 trillion, reflecting a decrease of approximately 33 per cent compared to the first half of 2021. Likewise, the number of deals completed in the first half of 2022 decreased 16 per cent, for a total of over 11,000 deals. During the first half of 2022, M&A activity in the United States reached a total deal value of approximately US$1.27 trillion, a decrease of 31 per cent as compared to US$1.85 trillion in 2021, the highest ever recorded opening six-month period. During the first half of 2022, US dealmaking accounted for approximately 42 per cent of global M&A activity, substantially lower than the 47 per cent in 2021, which was over 45 per cent for only the second time in 15 years. Additionally, deal volume in the United States during the first half of 2022 experienced a decrease relative to the first half of 2021, totalling approximately 9,681 deals, down from 11,186 deals during the first half of 2021. During the first half of 2022, M&A deal volume for targets located in the Americas – excluding the United States – decreased 28.5 per cent as compared to the first half of 2021, with 1,777 deals during the first half of 2022 as opposed to 2,487 deals during the first half of 2021. Total deal value for targets located in the Americas – excluding the United States – also decreased, reaching approximately US$102 billion during the first half of 2022, down approximately 52 per cent from US$212 billion during the first half of 2021 (all the above from Refinitiv).

US private equity activity fell compared to its blazing pace set in 2021, but remained healthy overall and showed steady deal volume in the first half of 2022. Through the first half of 2022, US private equity firms completed almost 4,000 deals with a cumulative value of over US$400 billion (Pitchbook). In North America, the US Federal Reserve’s interest rate hikes contributed to private equity firms expressing more caution and resulted in leveraged buyout (LBO) activity dropping 53 per cent in Q2 compared to the same quarter a year ago. In the first half of 2022, private equity LBOs in North America fell over 14 per cent in volume and over 20 per cent in value, as compared with the first six months of 2021 (Mergermarket). Notable announced or completed private equity acquisitions in the Americas during the first half of 2022 included the acquisition of American Campus Communities, Inc, the largest developer, owner and manager of student housing communities in the United States, by Blackstone for approximately US$12.8 billion; the acquisition of Zendesk by an investor group led by Hellman & Friedman and Permira for approximately US$10.2 billion; and CD&R’s US$4.5 billion acquisition of Cornerstone Building Brands Inc.

Europe, Middle East and Africa

M&A deal value in Europe, the Middle East and Africa (EMEA) for targets located in the region totalled approximately US$812.6 billion during the first half of 2022, a decrease of approximately 25 per cent from US$1.085 trillion during the first half of 2021. European M&A activity reached approximately US$755.6 billion of the total announced M&A deal volume, down 21 per cent during the first half of 2021. M&A deal value involving the Middle East and Africa reached US$92.2 billion, a year-over-year decrease of 41 per cent compared with the US$157 billion deal value reported during the first half of 2021. M&A deal volume involving the Middle East and Africa likewise decreased, and reached just 1,378 deals during the first half of 2022, after totalling 1,476 deals during the first half of 2021 (all of the above data provided by Refinitiv). European-based private equity activity (including exits, buyouts and secondary buyouts) reached approximately US$473 billion across 4,053 deals in the first two quarters of 2022, a rare bright spot in the recent international markets, as volume and value both increased, 16.2 per cent and 34.8 per cent, respectively (Pitchbook). As of the end of the first six months of 2022, there were 197 European private equity funds open in the market, looking to raise more than US$110 billion. The median deal size in European private equity grew to nearly U€50 million, led by a 300 per cent increase in total value received from deals over €2.5 billion, as compared to the first half of 2021 (Pitchbook). M&A foreign investment in EMEA accounted for only 21.5 per cent of the region’s value in the first half of 2022, down from the 29 per cent seen across 2021. The inbound M&A decreased in value by 37.4 per cent versus the first half of 2021 to US$127.9 billion (Mergermarket). Notable completed European private equity transactions during the first half of 2022 included the US$63 billion take-private buyout of Atlantia, Italy’s largest airport and motorway operator, by Blackstone; Blackstone’s US$23.8 billion recapitalisation of Mileway, a Dutch operator of urban warehouses in Europe; and KKR’s acquisition of London-listed power generation company ContourGlobal for US$2.16 billion.

Asia-Pacific

Announced M&A deal value in the Asia-Pacific region totalled approximately US$545.6 billion across 7,182 deals during the first half of 2022, which represented a year-over-year decrease in deal value of approximately 13 per cent from the first half of 2021 and a year-over-year decrease in deal volume of nearly 22 per cent. During the first half of 2022, M&A activity involving China totalled US$173.8 billion, representing a year-over-year decrease of 34.5 per cent. The notable decrease in M&A activity in China may be traced in part to both its own zero-covid-19 policy and the rising tensions with the US over Taiwan. China fell behind India for the title of the region’s dominant market (ranked by value recorded) for the second quarter of 2022. M&A deal value in Japan totalled approximately US$75.3 billion during the first half of 2022, a 29 per cent decrease in deal value from the first half of 2021 (all of the above data provided by Refinitiv). Notable private equity transactions announced in the Asia-Pacific region during the first half of 2022 included the approximately US$7.5 billion acquisition of Baring Private Equity Asia by EQT, and KKR’s US$5.8 billion take-private of Hitcahci Transport System Ltd.

Debt financing markets

During the first half of 2022, global syndicated loan revenue and volume decreased year-over-year 25.4 per cent to US$2.3 trillion and 17.9 per cent to 6,225 deals, respectively. Although syndicated loan value during the second quarter of 2022 witnessed an 18 per cent increase over loan value during the first quarter of the year and volume increased 4 per cent during the same period, this recovery was still far below numbers seen near the end of 2021. This also represented the second-lowest value in six years, narrowly outpacing the first half of 2020 hindered by the onset of the covid-19 pandemic. Globally, Q1 of 2022 saw a decrease of 36 per cent in value and a 31 per cent drop in volume as compared to Q4 of 2021. Syndicated lending in the United States represented 58 per cent of the global syndicated loan market by value, but decreased 19.1 per cent year-over-year in value to US$1.36 trillion and 22.5 per cent in volume with 2,541 deals as compared to the first half of 2021 (all the above information provided by Bloomberg).

As some indicators point towards a global recession, investment-grade loans have proven desirable and capital has been invested in higher-rated, safer companies’ debt. In the first half of 2022, US$1.25 trillion was raised in the investment-grade space. Additionally, bond sales have plummeted globally. On a year-to-date basis, issuance volume in 2022 fell to US$2.56 trillion across 9,294 deals, down 27.7 per cent from US$4.92 trillion across 12,045 deals at this time last year, and reflected the lowest levels since 2015. All major markets suffered – the Americas declined 43.6 per cent year-over-year, EMEA fell over 40 per cent, and Asia-Pacific reversed 42.8 per cent during Q2-to-date. Similarly, all issuers suffered – financial institutions slid 30 per cent, corporates dropped 47 per cent, and sovereigns or agencies decreased 41 per cent in 2022. The biggest cause for this downturn globally was the drop in corporate bond volumes in high-yield issuances, which printed just US$39.5 billion to date in 2022, down over 80 per cent from this time last year, and the lowest quarterly-to-date since 2011 (all the above information provided by Debtwire).

Portfolio company sales and public listings

Portfolio company exits by private equity sponsors declined compared to last year’s heated pace, in which exits reached their highest activity levels since 2000. Globally during the first half of 2022, private equity sponsors exited approximately US$326.6 billion across 536 exits, down 27 per cent and 19 per cent, respectively, as compared to the first half of 2021 (Mergermarket). The first quarter of 2022 was notably weak in the exit market, with a 57.5 per cent decrease in exit value and a 57.2 per cent drop in exit count as compared to the fourth quarter of 2021. Sponsor-to-sponsor deals, in which portfolio companies are sold between private equity firms, became the favoured exit option in the first half of 2022 as private equity investors were forced to rethink their exit models while capital markets suffered. In Q1 of 2022, sponsor-to-sponsor deals accounted for 64 per cent of all US exit value (Pitchbook). In addition, one of the trends that has continued to gain momentum in 2022 has been general partner (GP)-led secondary sales of portfolio companies to newer funds established by the same GP or to continuation funds established by the GP. Such a structure provides earlier investors in a private equity fund with a path to liquidity while still allowing the GP and other investors to remain invested in highly prized portfolio company assets for a longer hold period. While exit activity fall-off resulted in longer portfolio hold periods and slowed distributions to limited partners (LPs), the secondary sale market could mitigate both effects in the coming months, as GPs and LPs alike seek new paths towards liquidating their investments (Bain & Company). Notable portfolio company investment exits during the first half of 2022 included the acquisition of VMware, Inc by Broadcom Inc in a cash-and-stock transaction from investors including Silver Lake Partners and Michael Dell that valued VMware at approximately US$61 billion.

During the first half of 2022, the most notable exit-related slowdown occurred in the market for IPOs. While the first half of 2021 achieved the strongest recorded opening six-month period for IPOs, the first half of 2022 saw only US$3.4 billion of completed value. The completed value of private equity-backed public listing exits in the first half of 2022 has accounted for only 2 per cent of the total value completed throughout 2021. In Q1 2022, these public listings accounted for only 0.6 per cent of total exit value in the United States (Pitchbook). Only two IPO exits have been registered year-to-date for 2022 (Mergermarket).

Additionally, proposed regulations issued by the Securities and Exchange Commission (SEC) potentially could reduce private equity favourability for exits via transactions with a ‘special purpose acquisition company’ (SPAC). The SEC proposals would expand underwriter liability, reduce the scope of a safe harbour for financial projections by tailoring new requirements in line with those of a registration statement for an IPO, and require additional disclosures about SPAC sponsors, conflicts of interest and sources of dilution. These widespread regulatory changes appear to have chilled private equity interest in SPACs. The first half of 2022 has seen a total of 30 break-ups of SPAC mergers, while only one such case occurred in the first half of 2021. On the whole, only 17 break-ups occurred in all of 2021. The De-SPAC Index, a basket of companies that have completed their tie-ups, has crashed 67 per cent and more than 700 SPACs are on the clock to close or find deals ahead of approaching deadlines (Bloomberg).

H1 decrease in private equity fundraising

Global private equity fundraising in the first half of 2022, while robust with respect to many sponsors and sectors, underwent a slowdown in the aggregate relative to the same period in 2021. Aggregate fundraising volume dropped 27 per cent year-on-year, to US$337 billion. The total number of funds holding final closings during the first half of 2022 decreased nearly 40 per cent to 622, compared to 1,033 during the first half of 2021. However, the average size of funds closed during the first half of 2022 reached US$542 million, its highest level since 2017. This increase was driven largely by mega-funds, the top four of which raised at least US$15 billion each, as further discussed below. Consistent with recent prior periods, capital was concentrated at mega-funds (ie, funds raising approximately US$5 billion or more) of the recognised top-performing sponsors. This concentration demonstrates the continued consolidation in the private equity industry in favour of larger, established sponsors with proven track records as a result of institutional limited partners seeking to make larger commitments to fewer funds, consolidate manager relationships and invest with sponsors with whom they had prior relationships (particularly in light of the inability to meet new sponsors in person in light of pandemic-driven travel restrictions). Specifically, in the first half of 2022, the 10 largest funds together raised US$133 billion, which represents about 40 per cent of the total capital raised during this period. This indicates an increase in consolidation from 2021, where the 10 largest funds that reached a final close during the first half of 2021 raised approximately one-third of the total capital raised during the period.

Regarding the distribution of capital across different types of private equity funds, buyout funds accounted for 52 per cent of capital raised during the first half of 2022, while venture and growth funds constituted 22 and 17 per cent of capital raised, respectively. Buyout funds, however, made up only about 20 per cent of funds closed, while venture funds accounted for nearly 50 per cent.

Geographically, fundraising was concentrated in North America during the first half of 2022, in line with 2021. North America-focused funds accounted for 44 per cent of all capital raised in the first six months of this year, a similar proportion as in prior years. Comparatively, the percentage of total capital raised by Asia-Pacific-focused funds was 38 per cent, and by Europe-focused funds, 6 per cent, representing a slight decrease from 2021. Compared with the first half of 2021, in the first half of 2022 Europe-focused funds raised US$8 billion less capital than the prior period, while Asia-Pacific-focused funds raised around the same amount. Additionally, funds targeting multiple geographical regions attracted US$129 billion, or 38 per cent, of aggregate capital raised during the first half of 2022.

It is expected that overall fundraising levels will remain steady in the near term. There are 4,055 private funds in the market as at 20 July 2022 seeking to raise US$1.23 trillion in total capital, compared to 3,060 funds that were targeting US$703 billion at the same time last year. Many investors are also placing a premium on managers with established track records that have navigated a number of past economic cycles. Larger institutional investors will continue to consolidate their relationships with experienced fund managers and competition for limited partner capital among private equity funds will continue to increase, with alternative fundraising strategies (eg, customised separate accounts, co-investment structures, continuation funds, early closer incentives, umbrella funds, anchor investments, core funds, growth equity funds, impact funds, GP minority stakes investing, secondaries and complementary funds (ie, funds with strategies aimed at particular geographic regions or specific asset types)) playing a substantial role. As a result, established sponsors with proven track records should continue to enjoy a competitive advantage and first-time funds will need to accommodate investors by either lowering fees, expanding co-investment opportunities, focusing on unique investment opportunities or exploring alternative strategies. It should be noted that of the US$1.23 trillion in total capital targeted as at the end of July 2022, approximately 17 per cent is being sought by the 10 largest funds that are overwhelmingly managed by established sponsors. Moreover, it is anticipated that private equity fundraising will continue to focus on established, dominant markets in North America and Europe. Finally, it is also expected that the SEC will continue to focus on transparency (eg, full and fair pre-commitment disclosure and informed consent from investors) with respect to conflicts of interest (including, among others, conflicts of interest arising from the allocation of costs and expenses to funds and portfolio companies, the allocation of investment opportunities and co-investment opportunities, and the receipt of other fees and compensation from funds, portfolio companies or service providers). Given this, larger private equity firms with the resources in place to absorb incremental compliance-related efforts and costs are likely to continue to enjoy a competitive advantage over their peers.

The characteristics of a typical fundraiser reflect recent upward trends in investor demand for opportunities to invest in private equity funds and the consolidation of investor capital in experienced fund managers. Fundraising in today’s environment has become less episodic and more resource-intensive, with fund structures, terms and marketing timelines customised to most effectively address the business objectives of sponsors, particularly experienced sponsors with proven track records. The following is a simplified framework and timeline for a typical private equity fundraising.

In most cases, typical fundraising will begin with the preparation and distribution of a private placement memorandum to investors, which includes important information about the sponsor and the fund, including a term sheet setting forth the key terms of the fund and the offering of interests, along with additional disclosure information pertaining to the fund. Many private equity funds are structured as Delaware limited partnerships, but the structure and jurisdiction of the fund will depend largely on the sponsor and the asset class, geographic focus, and anticipated investor base of the fund. It is not uncommon for private equity funds to be organised in jurisdictions outside of the United States (eg, the Cayman Islands, Ireland or Luxembourg).

Legal counsel will work closely with the sponsor as part of the fundraising to prepare the draft limited partnership agreement, investment management agreement, subscription agreement and related fund documents, which are the definitive agreements governing the operation of a private equity fund. Key contractual points in the fund documents will vary on a case-by-case basis, but often include economic arrangements (eg, management fees and carried interest), tax structuring provisions and minimisation covenants, investment allocation provisions, limited liability protections, standards of care, governance rights, co-investment arrangements and allocations of expenses. It should be noted that increased regulatory scrutiny has resulted in a change in how marketing and offering documents are prepared. Environmental, social and governance (ESG) factors have also emerged as a fundamental underwriting criterion for investors, and although North America and Asia have lagged behind Europe in the adoption of ESG principles, the prevalence of these factors in recent client fundraising due diligence indicates that implementation is accelerating across all regions. As a result, drafting fund documents is now a resource- and time-intensive exercise, as pages and pages of granular disclosure are often added to such documents and more frequent updates are often made throughout fundraising in an effort to increase transparency.

Following delivery of the fund documents to investors, counsel and the sponsor will work closely with investors to resolve any questions or comments and, once a critical mass of investors’ subscriptions has been secured, the fund will hold an initial closing. Fundraising timelines in private equity can vary significantly depending on the sponsor involved and the type and size of fund being raised, running anywhere from a few months to a few years. Once an initial closing has been held, a private equity fund will typically be permitted to hold subsequent closings over a period of 12 to 18 months (although the average time spent in market by funds that held final closings during the first half of 2022 increased compared to funds closing beforehand). As the regulation of private equity funds continues to increase, it remains very important for sponsors to work closely with counsel to ensure that all necessary steps are taken to permit marketing in each jurisdiction in which fund interests are to be marketed.

Outlook for the second half of 2022

While global M&A activity decreased in the first half of 2022 following a record-shattering 2021 amid political turmoil caused by Russia’s invasion of Ukraine, continued supply chain problems, historic inflation rates, and increasing interest rates passed on by the US Federal Reserve and other central banks throughout the world, such activity still held near pre-pandemic levels. The remainder of 2022 is expected to continue at a lower rate than seen last year, perhaps falling from a Q2 rebound, especially as acquirers and private equity sponsors may find it difficult to find financing to do deals in the second half of the year. As inflationary pressure persists and indicators point towards a possible recession, the second half of the year is expected to fall in line with a tightening market similar to Q1 of 2022. However, with softer valuations in both public and private markets, private equity sponsors may seek to find attractive targets that were previously viewed as too expensive, although private equity firms may also generally choose to hold on to their current portfolio companies rather than sell for less favourable prices. In turn, we expect the continued use of GP-led secondary funds as an alternative exit route for the second half of 2022. Despite the tightening of equity and debt markets in the first half of 2022, private equity firms still sit on large amounts of ‘dry powder’, which reached a record US$2.3 trillion in June 2022, triple the amount that existed at the beginning of the global financial crisis (Pitchbook). Time will tell whether private equity firms wait for the market to stabilise further before taking advantage of lower valuations, especially for take-private deals involving public company targets. So far this year, 18 take-private deals captured over US$58 billion in value and remained on pace with the 46 take-privates worth a collective US$116 billion completed during the full-year 2021, which was the busiest year since 2016. The healthcare sector was notable for its take-private activity in Q2, with four take-privates completed, while the US$44 billion agreement by Elon Musk to acquire Twitter made headlines in recent months (Pitchbook). Overall, the economic downturn in 2022 has hampered M&A and private equity activity, and while there are few expectations of an immediate turnaround to 2021 levels, hope remains for dealmaking to continue to move forward to around the levels seen in the first half of 2022. Such projections are not expected to raise higher than first half level though in light of the difficulty of finding financing to do deals.