Hey Searchfunder fam! I aggregated market analyses from a couple larger private equity advisory firms and found some insights that could help any of us searchers.

1. Q3 2023 was the slowest quarter since the start of the pandemic

Deal flow in the US has softened and Q3 2023 was the slowest quarter since Q2###-###-#### However, 2023 is still shaping out to be a solid year with activity beating pre-pandemic levels. The decline in aggregate deal value shows a preference for smaller acquisitions rather than mega-deals as financing has been challenging.

Below are some charts to visualize the macro trends of financial buyers going down-market.

2. Large PE firms are also struggling to find deals

The majority of large deals in 2023 have been “Public to Private” as PE investors see an opportunity to swoop in with lower share prices compared to historical values (see below PE deals table for reference). October had just one megadeal from Vista Equity Partners in its take-private of EngageSmart for $4 billion.

3. Investors still prefer to back experienced managers over emerging managers

There is over $2.1 trillion in dry powder for PE investors globally but the total has been holding steady in recent months as fundraising has slowed. According to Preqin and Bain & Co., around 75% of buyout dry powder was raised within the last 3 years and is relatively fresh so fund managers will still have time to put money to work.

The total capital raised remains fairly high despite a steep drop in number of funds closed (see charts below for reference). This implies there is still a preference to allocate capital to experienced managers.

4. Private debt is a growing asset class

17% (~$167bn) of global fundraising was allocated to private debt investments in 2023 so far, a record high since###-###-#### This is up 6% since pre-pandemic, from 11% to 17%, and up 2% since 2022, from 15% to 17%.

5. Lending is down

Leveraged loan issuance ($573bn) in the United States is 22% lower YoY through October###-###-#### see chart below). Lending activity is down sharply due to a sharp drop in PE and M&A deals, higher cost of borrowing due to interest rate hikes, and economic uncertainty. Banks have also been shying away from funding large leveraged transactions.

Other notable trends

- Interest rates appear to be peaking as the Fed agreed to hold rates steady at###-###-#### % in the most recent meeting

- However, investors are expecting ‘higher-for-longer’ and this could put pressure on the drivers of private equity returns

- PE exit activity is showing signs of a gradual recovery as the stock markets have been rallying this year

Takeaways for searchers

I think these trends give us a couple actionable takeaways for searchers:

- I think most searchers today can agree that deals are competitive, and some of us have lost deals to middle market firms outbidding us. Many sellers won't choose the highest bidder, so the opportunity for searchers here is to strengthen our offers (most likely by being more creative with terms), lean into narratives for why we're the best buyers for sellers to accomplish their goals, and strengthen relationships with sellers.

- Be more open to less competitive (smaller) deals, because PE deals in the lower mid market and higher are so competitive that firms are moving to different ends of the market to find deals.
- To raise money in this environment, searchers can build relationships with investors earlier if possible, know their buy boxes, and help them find deals that fit their buy box. First-time searchers need to compensate for their lack of track record with deal quality and operator credibility -- great deals with strong operators are in scarce supply, so scarce that many investors will invest even if the manager doesn't have a track record.

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