Well, data-wise, private equity has held up relatively well—but in some areas, like exit activity and deal value, it’s beginning to crack under the weight of soaring interest rates from the Federal Reserve’s aggressive rate hikes.  

On the bright side, the private equity “machine should have shut down [in 2022]. It didn’t, and for me, that was the big surprise,” Tim Clarke, a senior private equity analyst for data provider PitchBook, told me last week. We’re still seeing “very robust buying and fundraising activity—like, the second-highest ever.” Though the declining numbers last year weren’t a surprise to him, “My gosh, it’s very resilient.” 

The not-so-great news? We’re starting to see all those pressures finally impact the PE space. Data for private equity performance lags, but thanks to PitchBook’s new annual report on the state of U.S. private equity, we can start to see some early trends: For the year, total U.S. PE deal count fell 2.4% while value dropped by nearly 20% from 2021, per PitchBook data. The important context here is that the value of deals last year still hit over $1 trillion—higher than 2019 levels (roughly $760 billion). 

Valuation-wise, Jill Shaw, a managing director of endowments and foundations at Cambridge Associates, predicts, “We’ll see continued declines across the board,” and told me that some of the areas in PE that “haven’t been hit with declines to date,” like small and mid-cap versus large-cap buyouts, for example, will start to see a dent.  

There are some bright spots: What impressed industry watchers like Clarke is that leveraged buyouts, or LBOs, didn’t drop off a cliff despite a big pullback in banks funding debt. “The main piston to the machine is the leveraged buyout—that's 50% to 60% of the dollar volume in any given year [in private equity]. And that should have shut down because the leveraged loan markets shut down,” he said. Instead, non-bank lenders (like private debt funds), which as Clarke notes are now often funds from PE firms themselves, “stepped in and almost replaced that bank market.”

But the area I think will be particularly interesting to watch is PE fundraising. When it comes to LPs getting their money back, patience has been, and will likely continue to be, the name of the game. Exits are dwindling: “Activity was sliding all year and now sits well below pre-COVID-19 levels,” the PitchBook report authors note. The IPO market, for one, was effectively slammed shut for most of 2022, and has few signs of reopening anytime soon; M&A exits, meanwhile, halved after a frenzied 2021, per PitchBook. Last year, PE firms exited 1,274 U.S. companies, which in total valued nearly $296 billion—roughly 28% and 66% lower, respectively, from 2021’s record-setting levels. 

“That will be a continued irritant: [Fewer] exits mean less distributions going out the door, [and] that goodwill you built up of doing four years worth of exit value in one year is eventually going to fade,” argues Clarke of fund managers. He says he expects PE fundraising to drop below its historic average. 

LPs were still funding PE firms’ massive coffers last year, though at a slowing pace, with 405 funds raising roughly $343 billion. That’s lower than 2021’s highs, but still above 2019’s fundraising pace, per PitchBook. The big factor impacting LPs in 2022 was the so-called denominator effect, where, because of the poorer performance of other assets like public stocks, the portion of LPs’ capital in private equity became overweight. And as the PitchBook report authors note, “a majority” of institutional LPs already allocated all of their 2022 PE capital as of the third quarter. That all means, “Many LPs [are] facing tough decisions regarding their allocations to the space in 2023.” 

So, what can we make of last year? It was the “start of a downturn,” says Clarke. As for what 2023 brings, it’s looking like we’re in for a tough couple quarters.

Anne Sraders
Twitter: @AnneSraders
Email: anne.sraders@fortune.com
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Jackson Fordyce curated the deals section of today’s newsletter.

VENTURE DEALS

- Aerones, a Riga, Latvia-based wind turbine maintenance and inspection company, raised $30 million in funding. Lightrock and Haniel co-led the round and were joined by Blume Equity, Change Ventures, Mantas Mikuckas, Metaplanet, Pace Ventures, and Future Positive Capital.

- Authenticx, an Indianapolis-based conversational intelligence platform for the health care industry, raised $20 million in Series B funding. Blue Heron Capital led the round and was joined by Beringea, Indiana Next Level Fund/50 South Capital Advisors, High Alpha, Mutual Capital Partners, Signal Peak Ventures, Allos Ventures, Elevate Ventures, and M25. 

- Forum Mobility, an Oakland-based zero-emission trucking solutions provider, raised $15 million in Series A funding. CBRE Investment Management, Amazon Climate Pledge Fund, Homecoming Capital, Elemental Excelerator, Obvious Ventures, Edison International, and Overture invested in the round. 

- Splitero, a San Diego-based home equity access provider, raised $11.7 million in Series A funding. Fiat Ventures led the round and was joined by Gemini Ventures, Joint Effects, PBJ Capital, Permit Ventures, Dream Ventures, Goodwater Capital, Spark Growth Ventures, and Oyster Fund.

- Quasar, a remote-based capital management blockchain, raised $5.4 million in bridge funding. Shima Capital led the round and was joined by Polychain Capital, Blockchain Capital, HASH CIB, and Osmosis founder Sunny Aggarwal. 

- Grounded People, a Vancouver-based footwear brand, raised $2.5 million in funding from Right Season Investments Corp. 

PRIVATE EQUITY

- Alpine Software Group, a portfolio company of Alpine Investors, acquired ThinkLP, a Waterloo, Canada-based loss prevention and safety case, audit, and analytics management software provider. Financial terms were not disclosed.

- SimiTree, backed by Sheridan Capital, acquired Afia, an Ann Arbor, Mich.-based behavioral health company, and GreenpointMed, a Boca Raton, Fla.-based behavioral health company. Financial terms were not disclosed.

OTHER

- Aptum acquired CloudOps, a Montreal-based cloud consulting, managed services, and software company. Financial terms were not disclosed.

- Unbabel acquired EVS Translations, an Offenbach am Main, Germany-based translation company. Financial terms were not disclosed.

- Verint acquired Qudini, a London-based appointment scheduling solutions provider. Financial terms were not disclosed.

IPOS

- Skyward Specialty Insurance Group, a Houston-based property and casualty insurance company, plans to raise $134.29 million through the sale of 8.95 million shares priced at $15. It had previously planned to price shares between $14-16.

- Nextracker, a Fremont, Calif.-based solar tracking systems designer and manufacturer, filed for an initial public offering.

PEOPLE

- Operator Collective, a San Francisco-based venture firm, hired Haley Daiber Brannan as investing partner. Formerly, she was with data.world.