2022 has been a rough year for Wall Street. But this could all change very soon for Private Equity firms.
Private equity firms have deployed capital in record lows this year as they search for undervalued businesses. Firms tend to accumulate LOTS of debt in order to boost returns… so rising interest rates and recession risks make it more likely that they'll end up overpaying for middling stocks.
The industry is facing a perfect storm. Deal flow has fallen to multi-year lows over the past year, and many firms have record amounts of dry powder. That's over $1 trillion of private equity capital in need of deployment.
While PE firms may prefer to sit on their cash for now, that doesn't necessarily mean they will be able to do so forever. These firms invest money for other people, so there are rules and regulations about what they can and can't do. In the end, they will have to invest the money or return it.
Experts believe that there will be an increase in acquisition volume next year. PE firms will likely target the industrial and healthcare sectors to find underperforming stocks they can take private.
Takeaway: Private equity firms are seeking creative ways to navigate the next global crisis. For example, investors bought oil assets after the March 2020 crash. PE firms that are able to acquire assets at a discount and then sell them later when the market recovers might find the current downtown a blessing in disguise. We might see many distressed buyouts next season as private equity firms race to get capital.