Cambridge Associates’ Andrea Auerbach: Private company valuations may take another year to reflect macroeconomy

'There are too many factors in motion at the moment to jumpstart overall transaction volume, particularly for new platforms.'

To gain insights on the current climate for private equity deals, PE Hub and PE Hub Europe reporters have been asking a wide range of sources to share their outlooks for 2023. Our series continues now with Andrea Auerbach, head of global private investments at Cambridge Associates, a Boston-based global investment firm. Auerbach leads a 50-person global team sourcing and underwriting private equity, growth equity, distressed, and venture capital funds, as well as direct, co-investment, and secondaries investment opportunities.

What were the most important trends in dealmaking in 2022?

The private equity markets started 2022 with a bang and ended with a whimper. We entered 2022 at elevated valuations, transaction volumes and fundraising pace. In December, it was downright quiet from a fundraising perspective, dealflow was down, and valuations weren’t what they once were.

What was the biggest challenge to completing deals in 2022?

Uncertainty – on a number of different levels. It’s one thing to pursue, bid on and complete a transaction when you believe you and your investment assumptions are on solid ground, it’s quite another to execute a deal when you realize your assumptions are actually on shaky ground, possibly a sinkhole, and you can’t judge its depth. When the market tremors become too large, many investors head for safer ground and wait for things to settle from a valuation standpoint. That’s what contributed to the stall in completed deals in the latter half of 2022.

How do you expect the first six months of PE dealmaking in 2023 to compare with the last six months in 2022?

The first six months of 2023 may be eerily similar to the last six months of 2022 in terms of deals done and pace. There are too many factors in motion at the moment to jumpstart overall transaction volume, particularly for new platforms. That said, the public-to-private trend will continue and portfolio company add-on activity will persist.

What will be the most important trends affecting dealmaking in 2023? 

There is an expectation that 2023 will be a great year to deploy capital, provided there is price capitulation by sellers. While the public market has been on an express train to correction, private company valuations are on the local train and could take potentially another year to fully reflect the impact of broader macroeconomic factors.

Given the micro nature of private equity investing, valuations often reflect the specific expected impact of factors on the company in question. For example, sustained inflation creates headwinds for businesses that do not have pricing power or are beginning to reach the outer limits of their pricing power; higher interest rates impact the use or effects of leverage, etc. Different sectors and different strategies may be more or less affected, so there will be pockets of productivity from a deal perspective.

Given current market conditions, areas of increasing investment interest to LPs include funds focused on more defensive industry sectors or sub-sectors, special situations, private credit and secondaries. LPs are revisiting and re-assessing GP operating capabilities as well.

What should the private equity industry be most worried about?

How it’s going to achieve the returns LPs expect given the realities of higher interest rates and inflation.

What should PE folks be most excited about for 2023?

The industry’s dry powder gets to go to work in a better valuation environment. I’m looking forward to the continued forward evolution of the institutional private markets, they are barely 40-something!

Editor’s note: For more of Auerbach’s insights on dealmaking amid high interest rates, click here to listen to PEI Group’s podcast series.