2021 saw a meteoric rise in the IPO market, with over 1,000 companies going public. That euphoria came to a grinding halt in 2022, which saw just 83 traditional IPOs get priced by December 9th. In comparison, there were more than 22,000 mergers and acquisitions in the first seven months of 2022. That represents a more modest 13% decline in volume from the previous year.
Low-interest rates, combined with market euphoria and a risk-on attitude, helped fuel the IPO market. But rising inflation and interest rate hikes have squashed investor appetite for high-risk IPO candidates. With macroeconomic forecasts remaining highly uncertain, the IPO drought will continue in 2023.
Private market exits, however, are expected to pick up the slack. While it’s unlikely for exits to reach 2021’s anomalous highs, M&A activity will likely reach pre-2021 levels in the new year due to healthy levels of dry powder, continued interest in sectors like energy and infrastructure, several geographic hotspots of activity, and a resurgent private credit market.
Dry Powder Near Record Levels
Preliminary data reported by S&P Global shows that private equity firms had an estimated $1.96 trillion in dry powder available for buyouts and investments as of December 15th, 2022. This figure represents a 21% year-over-year increase. This record level of cash reserves could help drive exits in the private markets in 2023.
Private market investors with a long time horizon will be the primary beneficiaries, as they’re looking for discounts and long-term value. While many private market investments made at 2021 valuations are now underwater, investments made during a downturn will be at a bargain.
Strong Interest in Energy and Infrastructure
The war in Ukraine, record-breaking cold, sabotaged pipelines, supply chain disruptions, and a shift away from traditional energy sources has brought about a renewed focus on energy security. Energy and power were M&A’s most significant sectors by value in the second half of 2022, and this trend is expected to continue in 2023.
The U.S. Inflation Reduction Act will also drive up secondary trades as investors look to capitalize on tax incentives related to infrastructure investments. This could bring more capital to the private markets as investors look to take advantage of the tax breaks and create long-term value.
Bright Geographic Hotspots
North America is expected to remain the center of the M&A universe in 2023, but there are also a few geographic hotspots to watch.
The Middle East will also remain an active hub for M&A activity as investors take advantage of the region’s natural resources and digital infrastructure. In 2022, the Middle East saw a record number of buyouts, and the region’s sovereign wealth funds are cash rich due to higher oil and gas revenues. The rise of “gigaprojects” also drives up the region’s activity.
Japan is another market to watch, as it’s one of the few to see an increase in M&A activity in the fourth quarter of 2022. A weak yen and renewed corporate sales activity have made the country attractive to foreign investors.
Private Credit Market Growth
As we enter a new market regime, traditional lenders are becoming increasingly cautious. This has created an opportunity for private credit markets to step in and fill the void. Private credit funds are becoming increasingly attractive to investors because of their ability to provide flexible financing solutions, often with fewer covenants and more attractive terms than traditional debt. This is expected to open the door for more private market exits in 2023 as private credit funds become more willing to finance buyouts and investments.
Unsurprisingly, over 80% of global private credit managers are bullish or cautiously optimistic about the market’s prospects over the next 12 months. Moreover, according to a survey by EY, most investors aim to increase allocation to private credit in 2023 – the highest of any alternative asset class.
This renewed interest in private credit markets, healthy levels of dry powder, and continued interest in sectors like energy and infrastructure are likely to drive more private market exits in 2023.