Private equity and venture capital firms remain pessimistic about fundraising conditions this year, according to the S&P Global Market Intelligence 2023 Private Equity Outlook Survey.
Almost half, or 45%, of private equity executives surveyed expect fundraising conditions in their location to deteriorate this year, while 34% said conditions will remain the same. Venture capital professionals were split, with 35% forecasting a deteriorating fundraising environment and a similar percentage expecting conditions to remain unchanged.
The global survey, which was released last week, canvassed a total of 511 private equity, venture capital and limited partner respondents between December 2022 and Jan. 15.
The sentiment revealed by the survey reflects data on dismal fundraising trends last year. The number of private equity funds that closed in 2022 dropped more than 45% year over year, while funds launched last year saw a 67% decline from 2021.
The downbeat assessment is being driven by several factors, including high inflation; rising interest rates; the record amount of dry powder, or uninvested capital firms are holding; and the smaller capital allocation institutional investors make to private holdings.
On the investor side, the biggest concerns of LPs about their private equity holdings in the next 12 months are further increases in inflation and interest rates, according to 43% of the survey respondents.
The steep decline in private equity exits was cited as the greatest concern by 35% of LPs. In 2022, the global aggregate value of private equity exits dipped 32% from the previous year, led by a dramatic pullback in IPO exits as market conditions deteriorated.
Rosier deal activity, with exceptions
Expectations for deal activity in 2023 were warmer. Thirty-eight percent of private equity professionals surveyed expect deal activity in their location to stay the same, while 34% said it will improve.
Venture capital respondents showed even more optimism in deal activity, with nearly half, or 48%, predicting deals in their location will improve. More than a third of venture capital respondents said transaction activity will stay the same.
Private equity executives and venture capital respondents identified clean energy and health technology as the most attractive sectors for investment.
LPs globally are averse to investing in China. About half, or 48%, indicated they would avoid allocating capital to a brand name private equity or venture firm targeting deals in China due to geopolitical and regulatory issues. Negative responses were the strongest among LPs in Europe, with about 66% saying they would steer clear of China, followed by North America with 54%.
The other strong response from LPs was whether they had interest in exposure to cryptocurrency developers and exchanges, not the currencies themselves. Globally, 58% said they had no interest at all.
Market Intelligence expects to publish the full survey by the end of the first quarter.