GP Trends 2022

Before we head into the main findings of this year's report, Investec's Economics Team provides some insight into the macro-economic environment.

The global economy emerged strongly from the removal of Covid-19 restrictions outside of China, the resilience of the labour market being a common noteworthy feature. However, this undoubted success had a flip side: surging energy prices, much exacerbated by Russia’s invasion of Ukraine, added an extra inflationary supply shock that looked more likely to be prolonged in such tight labour market conditions. This has left central banks across the globe scrambling to tighten monetary policy in a bid to cool demand and bring inflation back under control.

As yet, victory in the fight against inflation is elusive as labour market conditions remain tight. Fiscal support has had to be ramped up again in Europe to help deal with the energy price shock, if to varying degrees. With inflation at multi-decade highs, it is uncertain how much higher policy rates will have to be raised to bring inflation back to target. Ultimately, reversion to the ultra-low pre-Covid policy rates is no longer expected either. This has pulled longer-dated yields up too, pushing up funding costs for the government and, indirectly, companies.

Within the UK, a further complication has arisen as a result of the substantial fiscal easing plans announced by Chancellor Kwarteng in his mini-Budget. Markets were not convinced by the government’s assurances, not accompanied by an external assessment, that tax cuts would pay for themselves. On top of causing a plunge in sterling, this sent gilt yields soaring and triggered an emergency bond-buying operation by the Bank of England to prevent the collapse of certain defined-benefit pension schemes.

Through fiscal intervention, we expect recession to be averted in the UK and ameliorated in the Eurozone this winter. But sharply higher interest rates will increasingly weigh on the global economy. Recession now looks likely during H2 2023. By the end of next year, rates could be cut again in the US and also in the Eurozone; in the UK, on current fiscal policies it may take somewhat longer. All this is likely to make for a challenging backdrop for the industry. But as always at such times, dislocations will beget opportunities.

Welcome to the 12th annual GP Trends Report 2022, which has become established as a key bellwether for private equity (PE) industry sentiment and a signpost to the future trends shaping the asset class’s direction of travel.

We polled over 150 GPs (general partners) for this year through a period of profound change for PE firms. After delivering unprecedented levels of deal activity and record high fundraising in 2021, the survey findings show that GPs are pausing to assess the impact of inflation, interest rate hikes and rising energy costs on investment strategies, portfolios and fundraising schedules.

But while this is undoubtedly a challenging period for PE, the industry has a proven ability to deliver value for investors through market cycles, and the survey findings show that a large number of GPs still expect to deliver better returns for clients and raise larger funds over the next 24 months.

What has been particularly encouraging about this year’s survey findings has been the progress PE has made on diversity and gender equality. While there is still a way to go, the number of women and ethnic minorities working at partner level in the industry is growing, and with the survey research suggesting that firms prioritising diversity within their organisations are better equipped to attract and retain talent, the outlook for industry diversity is positive.

Also striking is the link this year’s report finds between firms that expect to be the most successful in the fundraising market and firms following environmental, social and governance (ESG) best practice. The findings also show that most GPs believe implementing ESG at portfolio company level goes to value on exit, and that ESG is a key influencer of investor decisions when it comes to backing new funds. ESG, it seems, is swiftly evolving from an exercise driven by compliance into a key differentiator in the fundraising market and a predictor of good financial returns.