In 2021, private equity registered record-highs in deal and exit activity globally—both in terms of deal number and aggregate deal value—which also pushed buyout exit valuations to new heights.1 U.S. venture capital deal value came in at more than double the previous record set in 2020.2 Global private credit fundraising recorded its second highest annual total.
Signs of public market turbulence affecting private markets
However, private markets are far from immune to the gyrations roiling public markets. There are signs emerging in data from the first quarter of 2022 (which also reflects conversations with our industry partners) of an incipient slowdown in private equity.
Take exit activity as an example. Following a frantic 2021 and facing a more uncertain public market, economic, and exit environment, private equity fund managers appear to be adopting a more cautious approach.
There were just 554 private equity exits recorded globally in the first quarter, with an aggregate value of $203 billion.3 While this extremely slow pace is unlikely to be maintained across 2022, exit activity does seem set to moderate.
In terms of exit path, the IPO market—though typically accounting for only a small share of exits—basically evaporated in the first quarter, accounting for just 0.5% of U.S. private equity exits. This is the lowest percentage on record.4
Venture capital (VC) deal activity shows signs of slowing too. Deal count and aggregate value, though still relatively strong, are both on pace to come in below the record pace of 2021.5 It is likely that the plunge in tech stocks will ripple through and show up more obviously in second quarter data, as valuation declines dampen VC deal and exit activity, particularly in late-stage VC, which is most reliant on the IPO market for exits.
Winds of change blow through hedge fund space
Data for hedge funds, which are far more immediately responsive to public market activity, highlights the dramatic shifts wrought by recent volatility.
Most investors will be acutely aware of how the standard global 60/40 equity/fixed income allocation swung from feast over recent years to famine in the first quarter—with bonds providing almost no shelter from the stock market decline.6 Our data shows that this decline has flipped hedge fund strategy performance on its head. Global Macro and Multi-Strategy funds have outperformed relative to both Equity Hedge and Event Driven strategies this year, after years of the inverse being true.
Macro and Multi-Strategy are generally more diversified across asset classes and less directional.7 Equity Hedge and Event Driven strategies tend to be more long-leaning approaches, which is a tailwind during bull markets but becomes a drag when the market turns.
Macro strategies will also have benefited from typically greater exposure to commodities: commodity prices rose at the fastest rate in over two decades in 2021 and may exceed that pace in 2022.
Having invested through a rare period of almost-uninterrupted outperformance by long-only assets, advisors and investors are coming to grips with a much-changed environment, one that is making clear the value of hedging and diversification.8
For a more detailed overview of alternative investments—including private equity, private credit, hedge funds, and real estate—read the second-quarter edition of the Alternative Investments Compendium.
(1) Source: PitchBook, as of March 31, 2022.
(2) Source: PitchBook, as of March 31, 2022.
(3) Source: PitchBook, as of March 31, 2022.
(4) Source: PitchBook, as of March 31, 2022. Note: Does not include bankruptcies, write-offs, or recapitalizations.
(5) Source: PitchBook, as of March 31, 2022.
(6) Source: PGIM, “US Stock–Bond Correlation: What Are the Macroeconomic Drivers?,” May 2021.
(7) Source: CAIA, “Hedge Fund Strategies”.
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