A new forecast report from investment research firm Third Bridge found that the technology and energy, infrastructure and resource sector will see the highest level of private equity activity over the next 12 months.
Last month, Alternatives Watch found that PE firms completed 219 deals totaling over $90 billion. There were 33 acquisitions and 185 investments ranging from pre-seed to Series E. Apollo struck a $2 billion bespoke preferred equity purchase of AT&T Mobility II, a U.S. wireless service provider, according to AW Research’s June Deal Watch.
“The widest gaps between what bidders are ready to pay and what sellers are prepared to accept for companies can be found in two sectors — technology plus energy, infrastructure & resources,” said Joshua Maxey, co-founder of Third Bridge. “Yet that’s exactly where the U.S. private equity industry is planning to be the most active over the next 12 months. This contradiction underlines just how highly coveted AI and infrastructure assets have become, which is where we are seeing intense research interest.
Founded in 2007, Third Bridge is a research platform that gathers insights via expert interviews on a monthly basis across a wide range of sectors on behalf of over 1,000 investment firms. In the second quarter, the top 10 searches undertaken by PE investors on the Third Bridge platform was dominated by terms associated with generative AI, Maxey added.
In a survey of 100 senior executives from U.S.-based PE firms whose last funds collectively raised around $500 billion in capital, 39% of respondents said the widest bid-ask spread is currently in the technology space while 20% said the widest bid-ask spread is in the energy, infrastructure, and resources (EIR) space. At the same time, a majority predicted that technology (90%) and EIR (79%) will see higher levels of PE activity over the next 12 months. Respondents also foresee sharp declines in PE activity in the transport (96%), business services (93%), and financial services (77%) sectors.
Broader PE trends
The majority of respondents (67%) interestingly expect that bank lending to PE will decrease further in the latter half of 2023. Maxey said that U.S. private equity is rapidly evolving, and a more agile and diversified industry is emerging. He sees the old PE approach of borrow, buy and build evolving into a more sophisticated playbook based on creating value through operational rather than financial leverage.
At the same time, 42% of PE firm execs say the exit multiples over the next 12 months will decrease as only 29% said their number of new acquisitions will increase over the same time frame. Almost half (48%) expect new deal value to decrease.
Size and scale are important trends in private equity. Maxey said that the Third Bridge survey, compiled by MergerMarket, found that the largest funds are more optimistic on their fundraising, deployment, exit and portfolio performance than smaller managers.
Smaller managers with recently closed funds worth $500 million to $1 billion expect the average value of new acquisitions to decrease. Only 36% of larger firms with a last fund of more than $10 billion.
Third Bridge also found that managers are not proactively looking to invest in new sectors and geographic expertise with the exception of mega-cap funds, where some 40% of managers plan to diversify into new geographies. Also 44% of those surveyed expect that duration they hold companies for to increase in the next year, rising to 56% among firms with a last fund raised of $1 billion to $5 billion.