Record dry powder to propel PE in 2023

The record levels of dry powder, which is expected to fuel high transaction volume, together with earnings will be the main engine of growth in private equity (PE) in the coming year.

According to Morgan Stanley, manager selection and the strategies capturing synergies best placed to generate alpha will also remain key given that rising interest rates may lead to reduced leverage and lower multiple expansion.

Although dry powder was forecast to stay at record levels of $3.6 trillion, investors should be prepared that fundraising may slow, Morgan Stanley said in a note.

“Amid continued competition for quality assets, deal origination at attractive value-at-entry levels is not a given, and general partners (GPs) must remain selective and disciplined to create value,” Patrick Reid, alternatives specialist at Morgan Stanley Investment Management, said.

“Earnings become increasingly important as a source of value creation due to multiple compression and rising debt costs. Investors continue to increase their allocations to alternatives to meet their long-term investment objectives.”

Reid also stressed that partnering with founders in the market, in particular with those seeking support from financial investors for the first time, would help reduce operational vulnerabilities and may make businesses less sensitive to economic headwinds.

“We are staying the course as PE absorbs market dislocations and capitalises on interesting entry points. PE is showing the most growth potential among private asset classes and is on track to account for nearly 70% of alternatives assets under management (AUM) by 2025, according to Preqin.