Private Equity’s 2022 Game Plan

As fund sizes swell with investor cash, PE firms feel pressure to find untapped value opportunities.
Kevin Thornton and Chris ReevesFebruary 25, 2022
Private Equity’s 2022 Game Plan

A strong economic environment, record dry powder in the form of $500 billion across the top 25 firms, and cheap capital have fueled a surge in U.S. private equity. Fundraising, deal, and exit activity are at a scale and pace not seen since the early 2000s. Indeed, 2021 was a record for PE exits, and exit values hit a 20-year high.

This year, PE players face competitive pressure from smaller firms eager to make aggressive moves and capitalize on favorable capital market conditions. 

In addition, financial sponsors face several questions that CFOs of strategic dealmakers and companies looking to sell to a PE buyer should know. These questions include: 

  • Will the activity levels and growth trends continue, or will they stall as too much capital chases too few attractively priced targets? 

  • Will the expected tightening by the Federal Reserve dampen the ability to raise cheap debt for leveraged buyouts? 

  • How will firms uncover value opportunities in a market already saturated with activity? 

Corporate finance executives should expect the unexpected, as private equity influence will be felt across areas previously considered out of focus for PE deal teams. For example, the sale of data and analytics assets from IBM’s Watson Health business to Francisco Partners represents a significant change from IBM’s original plans for the health care market. How will a PE owner change the direction and commercial vision of the business? The answer could shape how health care companies and PE firms deploy the considerable cash both have on the sidelines.

Here are our top three predictions for private equity dealmaking in 2022.

More large acquisitions. As fund sizes swell with investor cash, PE firms feel pressure to find untapped value opportunities. Many traditional buy-out targets have already been acquired and exited and now reflect higher-than-normal valuations. The major PE players and some upper middle-market firms will look for larger acquisition targets once considered too rich for PE. Sponsors are exploring creative options to move on these larger acquisitions, including working with one another. In June 2021, Blackstone, Carlyle, Hellman & Friedman, and GIC coordinated to buy Medline Industries in a $30 billion deal, one of the largest PE acquisitions in years. 

Expansion of the general partner (GP) stakes model. To focus on larger (and potentially fewer) deals, some tier-one firms will continue to expand affiliate asset relationships with smaller firms. Such investing allows a PE firm to acquire a minority equity position with another firm (the general partner, or GP) and its portfolio. These investments are essentially a bet on the future growth and performance of an invested PE firm already at scale. 

The acquired GP receives capital for fund deployment, and the acquiring firm shares in the growth while diversifying its portfolio. For the finance executives of portfolio companies, the stakes model investments provide access to operational resources and partnerships and fresh capital, all aimed at enabling growth and flexibility.

This GP-stakes alternative asset model has been implemented by a few select players on the buy-side — Blackstone Strategic Capital, Dyal Capital/Blue Owl, Goldman Sachs’ Petershill group, and a few others that focus primarily on investing in mid-market GPs, such as BC Partners, Vista Equity, and Arlington Capital. Look for these firms to continue to form GP relationships. New players addition will enter the GP-stakes market to tap into mature, well-managed, and performing holdings.

Increased targeting of divestitures. Small and large PE firms will pursue enterprise carve-out and spin-off targets, as companies look to capitalize on strong valuations. Technology-enabled business units will continue to be attractive as PE firms try to capture the rapid value creation and growth potential of digital technologies. With monetary policy changes looming, deal timelines could be accelerated. 

Executives interested in exploring partnerships with PE firms should have precise alignment on their digital roadmap, particularly over the next 12 to 24 months. For most companies in non-tech verticals, PE firms aren’t searching for advanced technology maturity as much as a native knowledge of where the company needs to be.

Company executives competing against PE for acquisitions or hoping to win spin-off attention should not underestimate the flexibility and innovation in PE business models and their determination to uncover value opportunities.

Kevin Thornton heads ISG private equity, working with ISG PE partners and their portfolio companies to optimize performance. Chris Reeves is director, ISG private equity.