2023

T H E I N S I G H T: S TAT E O F
T H E E U R O P E A N P R I VAT E
EQUIT Y INDUSTRY
Are we at a turning point?
4 th edition

IN PARTNERSHIP WITH:

CONTENTINTRODUCTION

31.

FUNDRAISING MOMENTUM WEAKENS

62.

CHALLENGING CONDITIONS

3.

I M PA C T I N V E S T M E N T

10DIVESTMENT ROUTES CHANGING

14

4 . 	I N F L AT I O N & I N T E R E S T R AT E S C R E AT E
L A R G E S T H E A D W I N D S F O R P R I VAT E E Q U I T Y
5.

16

R E G U L AT I O N D R I V E S E S G T R E N D S& I N V E S T O R E X P E C TAT I O N S

18

6 . 	D I G I TA L I Z AT I O N AT F O R E F R O N T O F
I N C R E A S I N G O P E R AT I O N A L F O C U SCONCLUSION

22ARTHUR D. LITTLEINVEST EUROPE

JONAS FAGERLUNDJULIEN KRANTZ

Partner, Sweden
fagerlund.jonas@adlittle.com

20

Research Director
julien.krantz@investeurope.eu

GUILLAUME PICQ
Partner, France
picq.guillaume@adlittle.com

General disclaimer
ADL’s conclusions are the results of the exercise of its best professional judgment, based in part upon materials andinformation provided to ADL by Invest Europe, secondary research, and expert interviews conducted by ADL. Use ofthis Report by any third party for whatever purpose should not, and does not, absolve such third party from using due
diligence in verifying the Report’s contents. Any use that a third party makes of this document, or any reliance on it, ordecisions to be made based on it, are the responsibility of such third party. Neither ADL nor Invest Europe accepts any
duty of care or liability of any kind whatsoever to any third party, and/or any responsibility for damages, if any, suffered byany third party as a result of decisions made, or not made, or actions taken, or not taken, based on this document.

2

ARTHUR D. LITTLEINTRODUCTION
There has been no let up in pressure in 2023, withpersistent inflation, rising interest rates, and ongoinggeopolitical issues weighing on Europe’s people,
businesses, and economies. While these are conditions
that the experienced private equity (PE) and venture
capital (VC) industry are used to navigating, they are
not ones to which it is immune.
Arthur D. Little (ADL) and Invest Europe’s European PE
survey, combined with Invest Europe’s first half activity
data, takes a clear look at the evolution of fundraising,investment, and divestment in the first six months ofthe year and gathers fund manager and investor viewson the short- and medium-term outlook for activity.
The survey also investigates the challenges andopportunities that have the potential to shape Europe’s
PE and VC industry further into the future.
Fundraising, investment, and divestment totals slowedin the first half of 2023, coming off high levels in 2022
— namely, record levels of fundraising and the secondstrongest year for investment. The interdependence of
all these elements and their relationship to the global
economy are evident. As growth slows and uncertainty
rises, PE divestments weaken, fundraising turns down,
and new investment softens.
Fund manager and investor expectations for the outlook
reflect the ongoing challenges from factors such as
inflation, interest rates, and economic uncertainty,
but also point to some tentative signs of improvement.
Higher expectations and preparations than last year
for exits could signal a pickup in activity that would
stimulate fundraising and investment. Near-record
levels of dry powder show an industry prepared to be
more cautious and conserve capital in more volatile
markets, but also well placed to support companies
through new investment and follow-ons.

3

R E P O R T : T H E I N S I G H T: S T A T E O F T H E E U R O P E A N P R I V A T E E Q U I T Y I N D U S T R Y

Also on display is the openness of European PE and VC
to new opportunities. General partners (GPs) and limited
partners (LPs) are embracing new ideas and offerings,
including impact funds. Meanwhile, managers are
tailoring products to democratize access to the asset
class, appealing not only to high-net-worths but also
to the broad “mass affluent” segment, as well as smaller
retail clients.
As always, sustainability is a central issue for European
private equity. Managers are increasingly embracing
environmental, social, and governance (ESG) at a firm
and fund level, hiring experts, and targeting “green”
funds that comply with the highest levels of Europe’s
regulatory framework on sustainability, as well as
investor expectations.
While the data and survey highlight the short-termpressures facing the industry, they also demonstrateprivate equity and venture capital’s evolution. Over the
medium and longer term, the industry is positioning
itself to be more sustainable, while opening up to abroader investor base — putting it evermore firmly at
the heart of Europe’s green transition and bringing thebenefits of PE performance to more of Europe’s citizens.

4

ARTHUR D. LITTLE

5

R E P O R T : T H E I N S I G H T: S T A T E O F T H E E U R O P E A N P R I V A T E E Q U I T Y I N D U S T R Y

1. FUNDRAISING MOMENTUM
WEAKENSPE fundraising slowed in the first half of 2023,

DACH (Germany [D], Austria [A], and Switzerland

coming off record levels achieved during 2022,[CH]) and Southern Europe fundraising was

as a mix of high inflation, rising interest rates,

also solid. In contrast, funds raised by UK andeconomic uncertainty, and protracted conflict

Ireland private equity contracted sharply,in Ukraine all weighed on Europe’s economy.

illustrating the region’s role as a home forInvest Europe’s preliminary data shows that funds

many pan-European managers, and the greater

raised €33 billion from investors in the first half,

impact of global conditions. Nordic funds’

a decline of 63% on the prior six months.

capital raising also slowed notably, reflecting a

There is a degree of cyclicality in fundraisingwith European PE firms having taken advantage

natural slow-down after a record year with largecommitments to some large fund managers.

of the recovery in 2021 and momentum into

In the midst of a deteriorating macroeconomic

2022 to raise capital. Furthermore, a reduction

outlook, GP and LP expectations point to thein the number of exits and a subsequent

continuation of challenging fundraising markets

weaker distribution of capital back to investors

ahead, albeit with several bright spots andhave led to more practical constraints to theopportunities (see Figure 2). While ~80% of GPs

redeployment of capital into funds.

surveyed expect weaker or neutral fundraisingThat said, it was not an equal picture acrossin the coming 12 months, the remaining
20% see stronger levels in the year to come.

Although weak, the sentiment still reflects an
Funds raised
byfunds
EuropeanPElargely
andBenelux
remained resilient,
in VC funds
improvement on 2022, indicating a bottoming
Europe (see Figure 1). Fundraising by France &line with recent performance. At a lower level,of fundraising conditions.

Figure 2. GPs’ fundraising expectations (next 12 month
months)Figure 1. Funds raised by European PE and VC funds
DACH

Southern Europe

France & Benelux

Nordics

Central & Eastern Europe (CEE)

90
69

70
57

50
30
20
10
0

89

81

80

40

(next 12 months vs. last 12 months)

UK & Ireland

€ bn

60

Figure 2. GPs’ fundraising expectations

39

54
20
18

20

62

2023

5

20

21

9
3
5

5
10
2
7
3 2 0.4 3
1

1 3

1

H1-20 H2-20

H1-21

H2-21

Stronger Neutral

Weaker

19.9%

49.7%

30.5%

46

34

22

18

GP

2022 6.0% 21.6%

11
5

24

33
7

7
21
14
2.4 0.3 1 6

5
3
4 0

H2-22

H1-23

H1-22

72.4%

15

Source: Investing in Europe: Private Equity Activity H1 2023, Invest Europe

6
Source: Arthur D. Little, Invest Europe

2021

53.3%

0%

20%

41.7%

40%

Source: Arthur D. Little, Invest Europe

60%

80%

5.0%

100%
2

ARTHUR D. LITTLEAs shown in Figure 3, longer-term expectations

In a shifting fundraising landscape, increasingon allocations to the asset class have softened

numbers of GPs are attracted by the opportunity

modestly from 2022, as the prospect of higher

to raise funds from wealthy individuals (see Figure

interest rates for longer increases headwinds4). Some 85% of fund managers are interested

for companies, while also giving investors otherin raising capital from ultra-high-net-worth

options in their hunt for yield. Nonetheless,individuals, reflecting their sophistication andalmost nine out of 10 LPs expect capital

appetite for illiquid assets, as well as the potential

allocations to private equity to stay the samefor GPs to cater for a relatively small pool ofor improve over the next three years, illustrating

investors. However, the number of firms also

investors’ belief in the potential for private

considering “mass affluent” clients with assets

equity to continue to deliver outperformance.

in the €100,000 to €500,000 range increased
sharply to over half, indicating a desire to tailor“Higher interest rates and therefore higher bondproducts to a broader investor base. Less than one

yields do give investors new options for yield.

in five are drawn to the smaller retail client space,

However, there will always be a place for private

where challenges include the need for products

equity in the portfolio simply because few otherwith more liquidity and potentially different fee

investments can generate that kind of alpha.”structures, as well as greater scrutiny and moreregulation.

Frank Amberg, Managing Director,

capitalHead
allocations
to PE
assetAltamarCAM
class in next three years
of Infrastructure
Germany,

Investors’ increased focus on generating socialand environmental value is evident in the funds

Figure 3. LPs’ capital allocations to
PE asset class in next three years

they intend to back (see Figure 5). Almost a thirdLP

funds over the coming 12 months versus just 2%

expect to allocate more resources to impact

More

Same

Less

19.1%

69.7%

11.2%

that expect to allocate less. The influence of thegrowing private market funds universe is also2023

evident, giving LPs greater ability to navigate
more difficult markets via their commitments.
Almost a quarter anticipate allocating more to

2022

26.4%

63.9%

secondaries funds, while some 20% foresee a

9.7%

higher allocation to both growth and credit funds,
as higher interest rates create opportunities for
those involved in lending, as well as managers that

2021

58.8%

38.8%

avoid, or use minimal debt, in their investment

2.4%

models. It is important to note that only a minority
of investors expect to allocate less to any private

marketstrategy
the coming
12 months.
Figure4. Interest
market future
funds
tooverwealthy
individuals,
0%
20%
40%
60%level
80% to100%
irrespective
regulatory barriers
Source:Arthur D. Little, Investof
EuropeFigure 4. Interest level to market future funds to wealthy individuals, irrespective of regulatory barriers
GP

urope

2023

GP

70%
51%

“Mass-affluent” clients

Not of interest

3

85%

Ultra-high-networth clients

Smaller retail clients

2022

37%
17%
16%
11%
22%

Source: Arthur D. Little, Invest Europe

7

R E P O R T : T H E I N S I G H T: S T A T E O F T H E E U R O P E A N P R I V A T E E Q U I T Y I N D U S T R Y

THREE- QUARTERS OF
G P s B E L I E V E T H AT A
STRONG APPROACH TO
ESG WILL BE CRITICALT O S TA N D O U T

The rapid rise of ESG issues up the agenda isalso clear in the differentiating factors thatinvestors will look for in managers (see Figure6). Three-quarters of GPs believe that a strong
approach to ESG will be critical for firms tostand out in their quest to attract capital,
also highlighting Europe’s leadership role insustainable investing and the regulation thatshapes it. Importantly, ESG considerations move
past a GP’s track record — which remains astrong second
differentiator— and investment
Figure 5. Expectedchanges
in investment
strategy allocations (nextstrategy, which moves down the agenda.
12 months vs. last 12 months)

Figure 5. Expected changes in investment strategy allocations (next 12 months vs. last 12 months)
LP

More

Impact funds

30.3%

Same

Less
2.2%

67.4%

Secondaries asset funds

23.6%

Growth funds

20.2%

70.8%

9.0%

Credit funds

19.1%

74.2%

6.7%

Venture funds

15.7%

Buyout funds

14.6%

Infrastructure funds

66.3%

5.6%

Real estate funds

5.6%
0%

18.0%

77.5%

11.2%

Distressed asset funds

4.5%

71.9%

7.9%

79.8%

9.0%

86.5%

7.9%

82.0%
10%

20%

30%

40%

50%

12.4%
60%

70%

80%

90%

100%

Figure 6. Most important factors for PE firm differentiation withinmarket5
Source:Arthur D. Little,inInvestnext
Europe two to three years
Source: Arthur D. Little, Invest Europe

Figure 6. Most important factors for PE firm differentiation within market in next two to three years
GP

2023

GP

2022
74%

Approach to ESG

51%
69%
72%

Past performance/return
51%

Investment strategy

70%
47%
47%

Partner team experience
15%
19%

Diversity, firms’ value & inclusion

Other

7%
7%

Source: Arthur D. Little, Invest Europe

Source: Arthur D. Little, Invest Europe

86ARTHUR D. LITTLE

9

R E P O R T : T H E I N S I G H T: S T A T E O F T H E E U R O P E A N P R I V A T E E Q U I T Y I N D U S T R Y

2. CHALLENGING CONDITIONSIMPAC T IN V E S TMENT

PE investment weakened in the first half ofwhich is continuing to produce and fund early-

2023, as difficult financing conditions andstage success stories across fields, including

uncertainty around valuations weighed on PE

deep tech, climate tech, and biotech.

and VC deployment. Invest Europe’s preliminary
data shows that total investment levels fellby 47% on the previous half year to €32 billion,
continuing the downward trend that began in
2022 (see Figure 7). The number of investments
fell at a slower rate indicating that larger

More difficult conditions are impacting GP
optimism regarding investment opportunities(see Figure 8). Just one in five anticipate astronger investment environment over the next
12 months, down 10 percentage points from lastyear, and more than 30 points below 2021 levels.

leveraged buyouts were most affected by

The corollary is that 50% of managers now see a

the more challenging environment.

weaker outlook for investments over the next year.

Growth investments declined in number,“The investment outlook is and will remain

but more so in investment volume, as funds
exercised relative caution around some larger
funding rounds for fast-growing and scaling
businesses. VC funding slowed at the lowest

challenging, until such time as visibility improves
and buyer and seller valuation expectationsalign.”

rate in terms of capital invested, underlining

Dariusz Pietrzak, Partner,

Europe’s robust and vibrant start-up scene,

Enterprise Investors

Figure 7. Investments by stage in value and volume

Figure 8. Perception of investment opportunities ilast
12 months)
Figure 7. Investments by stage in value and volume months vs.
Figure8. Perceptionof investment opportunities
in market (next 12 months vs. last 12 months)

Venture (RS)Buyout (RS)Growth (LS)

Growth (RS)Other (LS)Buyout (LS)

Venture (LS)€ bn

No. of companies

80
69
3

70
60
50
40

43
1
6

48
1
10

5,000
69
1
18

20

-47%
60
1

Stronger

Neutral

Weaker

19.9%

30.5%

49.7%

2023

4,000

11
3,000

39

41

32
0
6

2,000

20

1,000

2022

29.9%

28.4%

41.8%

31

30

6

6

H1-20

H2-20

LS = left scale; RS = right scale
Source: Invest Europe

LS = left scale; RS = right scale
Source: Invest Europe

10

17

36

10
0

77
1

49

30
20

GP

11

11

11

H1-21

H2-21

H1-22

7

6

H2-22

H1-23

2021

51.7%

40.8%

7.5%

0
0%

20%

40%

60%

80%

Source: Arthur D. Little, Invest Europe

Source: Arthur D. Little, Invest Europe

7

100%

ARTHUR D. LITTLE

R E N E WA B L E E N E R GY
AND LIFE SCIENCES &H E A LT H C A R E C O N T I N U ETO TOP THE LIST OFM O S T AT T R A C T I V E
SECTORS

While expectations for near-term activity have
weakened, the European PE and VC industry
is in a strong position. European capital undermanagement (CUM) stands at a record of morethan €1 trillion with dry powder of €348 billion,
spread across all regions (see Figure 9). Thosereserves may be held until conditions become
clearer and there is closer alignment between
buyer and seller price expectations. However,they also mean a sizeable war chest for new
near-term opportunities, including investmentthat can support existing companies in their

European PE’s focus on sectors that can

growth.

accelerate the continent’s energy transition
and improve citizens’ health is undiminished, in

Despite a weak investment outlook, pressurespite of tougher conditions. Renewable energy

on GPs to return cash to investors that need

and life sciences and healthcare continue toliquidity will be a key factor shaping activity in

top the list of most attractive sectors, with only

the remainder of 2023 and into 2024 (see Figure

modest change in their levels of absolute appeal

10). Over half of GPs expect more secondary

to managers (see Figure 11). At the same time,

buyouts and investments compared to last

the attraction of transformative technology

year. In more challenging markets, GPs haveand innovative food production techniques areturned to GP-led secondaries to generatehigh on rankings, especially deep tech, which

liquidity and bring in new capital to invest in

has moved up by more than 10 percentage

portfolio companies — an approach that also

points. Both deep tech and agribusinesses likely

enables them to hold businesses for longer,

are driven by a growing technology content as

thereby creating greater value and ultimately

well as opportunities to automate production

maximizing returns.

processes. Business services is still a hot
area as companies are increasingly becoming
more reliant on managed services solutions of

e 9. PE and VC firms’ capital under management,2022
different sorts.
Figure 9. PE and VC firms’ capital under management, 2022
Nordics

Southern Europe

UK & Ireland

France & Benelux

CEE

DACH
€112
€507

CUM
€1,004 bn
DP€348 bn

48%

29%
€85
€238

€51

37%

40%

€11

36%

40%

= Capital under management (CUM)= Dry powder (DP)
Note: Capital under management (CUM) is defined as the total amount of funds available to fund managers for future investments, plus the amount of funds already invested(at cost)(CUM)
and notis
yetdivested
to asset
under(AUM),
to totalof all financial
assetsmanagedof
byfunds
an investment firm
under management
definedasopposed
the total
amountof management
funds available
towhichfund refers
managers
formarket
futurevalue
investments,plus
the amount
Source: Invest Europe, EDC
ed (at cost) and not yet divested opposed to asset under management (AUM), which refers to total market value of all financial assets managed
ent firm
9
t Europe, EDC

11

R E P O R T : T H E I N S I G H T: S T A T E O F T H E E U R O P E A N P R I V A T E E Q U I T Y I N D U S T R Y

Figure 10. Expected changes in PE transaction market (next 12months vs. last 12 months)
Figure 10. Expected changes in PE transaction market (next 12 months vs. last 12 months)

GP
Secondary market
Primary market

35%

Corporate spinoffs

33%

Public-to-private deals

More

Same

Less

54%

37%

9%

48%

17%
6%

61%

27%

54%

19%

FigureExpected
investment
operation24%
activity levels per top five
State-owned11.
(privatizations)
3%
73%
target sectors compared
last 12months
0%20% to 40%
60%
80%
100%
Source: Arthur D. Little, Invest Europe

Figure 11. Expected investment operation activity levels per top five target sectors compared to last 12 months

GP

GP

2023
Higher

Same

Lower

Higher

Same

63.5%

34.0% 5.8%

Renewable energy

49.1%Life science & healthcare

60.2%

Renewable energy

2022

53.9%

Lower

32.7% 3.9%
40.0% 6.1%
10Life science & healthcare

50.0%

Deep tech

43.1%

42.2%

14.7%

Deep tech

31.7%

Agribusiness

41.4%

50.5%

8.1%

Agribusiness

40.4%

50.5%

9.1%

Business services

40.7%

55.6%

3.7%

Business services

32.2%

57.9%

9.9%

Source: Arthur D. Little, Invest Europe

0%

20%

40%

60%

0.9%

80% 100%

0%

48.5%

19.8%

20% 40% 60% 80% 100%

Source: Arthur D. Little, Invest Europe

Industries exposed to higher interest rates andSource: Arthur D. Little, Invest Europe

cyclicality remain relatively less attractive to
PE managers. At the bottom of the list, some
60% of GPs see real estate as less attractive
than over the past 12 months, a significantly
larger proportion than in 2022’s survey (seeFigure 12). In contrast, fewer respondents see
the automotive and consumer goods and retailsectors as less attractive than a year ago,although the percentage expecting a higher
level of investment remains below one in 10
in both cases.
While high interest rates are having a clear
dampening effect on the European economy,
the majority of respondents believe they will
have a limited impact on private equity’s ability
to finance new acquisitions (see Figure 13). Just
over a third assume that higher borrowing rates
will have a significant impact, largely in line with
the number of respondents last year.

12

ONGOING GEOPOLITICAL11
TENSION IS NOTO N LY R E S H A P I N G T H E
L ANDSCAPE IN EUROPE
A N D G L O B A L LY, B U T
ALSO INTEREST AND
D E M A N D I N M I L I TA R Y
A N D D E F E N S E - R E L AT E D
INVESTMENTS

ARTHUR D. LITTLE

Ongoing geopolitical tension is not onlyInterestingly, LP and GP opinions are in lockstep

reshaping the landscape in Europe and globally,

and indeed even closer than they were last

but also interest and demand in military and

year, as both groups rethink their boundaries

defense-related investments. Respondents seeon potential ESG exclusions and consider the

Figure
12. Expected
investment
operation
activity
per bottom
fivemore opportunities
in that sector,
particularly
increased
importanceof national
security andin dual-use
technologies
that haveto
bothsovereignty.
targetsectors
comparedlast 12 months
military and civilian applications (see Figure 14).

Figure 12. Expected investment operation activity per bottom five target sectors compared to last 12 months
2023

GP

2022

GP
HigherReal estate

4.6% 35.6%

Automotive

9.7%

Same

Consumer goods & retail 13.8%

50.4%

Chemicals

69.9%

HigherReal estate

7.6%

41.9%

Automotive

5.0% 37.6%

35.8%

Consumer goods & retail 10.8% 36.0%

59.8%

48.4%

7.5%

Lower

22.6%

Chemicals

Same

53.3%

39.1%
57.4%

68.8%

9.4%

Lower

53.2%
21.9%

Financial services
15.6%
64.4%
17.3%
62.4%
22.0%
Figure 13. Impact
of interest
ratechanges
on ability18.3%
to finance
0% 20% 40% 60% 80% 100%0% 20% 40% 60% 80% 100%
upcoming acquisitions

Financial services

Source: Arthur D. Little, Invest Europe

Figure 13. Impact of interest rate changes on ability to finance upcoming acquisitions
Source: Arthur D. Little, Invest Europe

GP

2023

GP

12

2022
36%

Significant impact

35%
54%

Limited impact

57%
9%

No impact
Figure14. Change8%in willingness to consider investments
into military- or defense-related sectors
Source: Arthur D. Little, Invest Europe

Figure 14. Change in willingness to consider investments into military- or defense-related sectors
GP

LP

2023

Source: Arthur D. Little, Invest Europe

Yes, but only into dual-use
goods & technologies(civilian & military)Yes, into goods &technologies specificallyfor military use

17%

10%

18%

13%

6%

11%
8%

13

2%

5%

No, willingness is thesame as before

No, willingness islower than before

2022

7%
67%

74%

69%

72%
14%
8%

Source: Arthur D. Little, Invest Europe

Source: Arthur D. Little, Invest Europe

14

13

R E P O R T : T H E I N S I G H T: S T A T E O F T H E E U R O P E A N P R I V A T E E Q U I T Y I N D U S T R Y

3. DIVESTMENT ROUTES CHANGING

In parallel with other measures of activity,
preliminary data from Invest Europe showsthat divestment slowed in the first half, downby 45% on the previous six months to €9billion. By number of transactions, exits acrossall segments also fell to lower levels. The
uncertain economic outlook, higher interest

U N C E R TA I N E C O N O M I C
OUTLOOK , HIGHERI N T E R E S T R AT E S , A N D
GEOPOLITICAL TENSIONSA R E C R E AT I N G P R E S S U R E

rates, and geopolitical tensions are all creatingpressure on the divestment market, leading to a
disconnect between buyer and seller valuations
and expectations.

GP expectations for the divestment outlook
remain low as the threat of economic downturn

As holding periods lengthen, and it becomes
more common for PE firms to own successful
businesses for the long term, the data indicates
that, for many managers, the best option may
be to continue to own the business (see Figure15). Doing so, they can seek to continue to drive
value through operational improvements, while

weighs on companies across the continent(see Figure 16). Only 20% expect a stronger
exit environment over the coming 12 months
compared to almost double that number
expecting a weaker outlook. While sentiment isnotably less optimistic than in 2021 in the postCOVID-19 economic recovery, expectations havepicked up since last year with those expecting a

Figure16.
Expectedchangesin divestme
divestment scene
doubling.
Figure 15. Divestments
by stagein value
andstronger
volumeto maximize exit value
for investors.
(next 12 months vs. last 12 months)
waiting for market conditions to pick up in orderFigure 16. Expected changes in divestment of
Figure 15. Divestments by stage in value and volume
Venture (RS)Buyout (RS)Growth (LS)

Growth (RS)Other (LS)Buyout (LS)No. of companies

€ bn
30
25
20
15
10
5
0

10
0
2
7

16
1
3
10

19
1
4

1,000

26
1
4

GP

2023

Stronger

Neutral

Weaker

19.9%

43.0%

37.1%

800
16
0
3

700

17
0
4

20
13

12 months)

900

600
9

11

11

2022 9.7%

28.4%

61.9%

500
2

400
0

7

2
2
2
1
1
1
1
H1-20 H2-20 H1-21 H2-21 H1-22 H2-22 H1-23

LS = left scale; RS = right scale
Source: Invest Europe

14

Venture (LS)

portfolio companies (next 12 months vs. last

300
200

2021

63.3%

33.3%

3.3%

80%

100%

100
0

0%

20%

40%

Source: Arthur D. Little, Invest Europe

Source: Arthur D. Little, Invest Europe

60%

ARTHUR D. LITTLE

Given weak levels of divestment over theBoth GPs and LPs are in relative agreement

past 12 months, more GPs are expecting anover the prospect for continued valuation

improvement in most exit routes than last year

declines over the next 12 months, following— with the exception of management buyouts

some resetting of valuations and expectations

and buybacks, on which views are largely

during the past year. Opinions diverge somewhat

unchanged (see Figure 17). While only a minority

over the expected volume of transactions, withbelieve that any of the main divestment options

GPs notably more optimistic than LPs. However,will be more common, the largest number —expectations for all parties are markedly

and a sizeable minority — see more proprietary

better than last year, potentially pointing to asituations. The challenging conditions

bottoming of the exit market and an uptick inmean that many managers will be keen todivestments.

conclude agreements following preemptive
approaches or bilateral off-market discussions,
reducing scrutiny on processes while allowing
parties more time to conduct due diligence.
Nonetheless, the number expecting moredivestment activity via auctions and IPOs has
also increased, reflecting the relative absenceof public listings and large managed asset
auction processes over the past year.

Figure 17. Expected changes of exit route for companies underownership (next 12 months vs. last 12 months)

Figure 17. Expected changes of exit route for companies under ownership (next 12 months vs. last 12 months)
2023

GP

More

Proprietary situations

Same

45%

Less

50%

More

5%

Proprietary situations

Auctions

28%

56%

16%

Auctions

Management/
owner buyback

23%

61%

17%

Management/
owner buyback

IPOs

14%
0%

25%
20%

2022

GP

IPOs

61%
40%

60%

80%

100%

Same

27%

57%

15%

60%

25%
10%
3%
0%

9%

54%

37%

16%

Less

87%
20%

40%

60%

80%

100%

Source: Arthur D. Little, Invest Europe

Source: Arthur D. Little, Invest Europe

17

15

R E P O R T : T H E I N S I G H T: S T A T E O F T H E E U R O P E A N P R I V A T E E Q U I T Y I N D U S T R Y

4 . I N F L AT I O N & I N T E R E S T R AT E S
C R E AT E L A R G E S T H E A D W I N D S
F O R P R I VAT E E Q U I T Y
In keeping with last year, inflation is the leading

greater concentration of issues in the US

concern for private equity GPs, with over 60%

regional banking space.

ranking it as the most negative, or second“Inflation is not going away without a fight. That

most negative, factor impacting the economic

and high interest rates will be serious headwinds

outlook — the same proportion as LPs who viewfor private equity for the foreseeable future.”

it as strongly negative (see Figure 18).

Elias Korosis, Partner,

Opinions diverge on higher interest rates, which

Federated Hermes GPE

about half of LPs rate as the most negative
factor versus approximately a quarter of GPs.

When it comes to factors that are within theBoth inflation and interest rates are ranked by

PE industry’s control, well over two-thirds of

LPs and GPs as more serious than economic

GPs and LPs expect to spend more time on ESG

uncertainty — and well ahead of supply chain

issues and the collection of KPI data points

disruption, which rated as a more severe issue(see Figure 19). More than two-thirds of GPs

last year, particularly among GPs, as the world

also anticipate more attention to diversity andcontended with supply issues stemming from

inclusion in their near-term operations, ahead of

COVID-19 and the subsequent normalization

LPs who may have had more focus on the topic inof production and trade.

recent times. The majority of GPs expect to havemore focus on all issues, demonstrating theirattention
to navigating
challenging markets
Figure 18.
Negatively impacting factors on
business
operations
andandappears to be the least negative factor byconditions, while addressing rising regulatory
performancefar, reflecting the swift action by European
requirements and investor demands.
Most recently, the impact of banking failures

governments and regulators, as well as the

Figure 18. Negatively impacting factors on business operations and performance
Higher inflation - LP
Higher inflation - GP

24%

Interest rate increases - LP
Interest rate increases - GP

23%

Economic uncertainty - LP
Economic uncertainty - GP

19%
20%

Supply chain disruption - LP
Supply chain disruption - GP

4% 15%
14%

Geopolitical instability - LP 2% 6% 9%
Geopolitical instability - GP
6% 10%
Recent bank failures - LP
Recent bank failures - GP

1% 2%7% 7%
1% 3%3%6%
1%

38%

35%
49%

24%
19%

29%

16%
21%

26%

28%
21%

3

4

45%

8% 2% 2%5% 2%
8% 2% 2%
8% 1%
4%
12%

3%
1%

15%
5%
13%
6%

64%

86%
2

24%

44%

20%

19%

1 (most negative)

28%
23%

24%
24%

13%

13%

15%
20%

29%
23%

15%
11%

26%
17%

27%

5

6 (least negative)

Source: Arthur D. Little, Invest Europe

16

Source: Arthur D. Little, Invest Europe

18

16

ARTHUR D. LITTLE

The near-term focus of GPs is also evident in“Managing ESG is having a clear impact on

the due diligence fields receiving heightened

our time and resources. Ultimately, it’s anscrutiny. More than three-quarters of managers

opportunity — as a way of attracting LP capital,

expect to do more assessments around ESG andgenerating new investments, and adding value

cybersecurity (see Figure 20). Consideration of

to companies.”

digital maturity at businesses and geopolitical

Maaike van der Schoot,risks will also receive more attention among

Head of Responsible Investment,over half of GPs, followed by assessments

AlpInvest, a core division of Carlyleof global financial risks. Less important are
intellectual capital considerations and thethreat of future pandemics, although 98% of
GPs expect some form of change to their due
diligence procedures.

Figure 19. Expected changes in near future, daily operations

Figure 19. Expected changes in near future, daily operations

GP

More

Same

80.6%

Attention to ESG

LP

Less

More

Same

Less

19.4%
0.0%

Attention to ESG

70%

30%

70%

30%

Collection of KPIs
or data points

70.9%

28.6% 0.6%

Demand for KPIs
or data points

Attention to diversity& inclusion issues

66.9%

32.0% 1.1%

Attention to diversity& inclusion issues

40%

58%

Attention togeopolitical risk
Investor relations’communication
toward LP
Attention to risk
management

60.6%

39.4%

43%

57%

59.4%

40.6% 0.0%

54.3%

45.7%

Attention togeopolitical risk
Investor relations’communication fromthe GP
Attention to risk
management

0%

20%

40%

60%

0.0%

33%

66%

44%
0%

80% 100%

20%

0%

55%
40%

60%

80%

100%

Figure 20. Areas receiving increased attention in future due diligenceprocesses
Source: Arthur D. Little, Invest Europe

Source:Figure
Arthur D. 20.
Little, Areas
Invest Europe
receiving increased attention in future due diligence processes

19

GP
ESG assessments

78.1%

Cybersecurity assessments

74.8%

Digitalization maturity assessments

55.0%

Geopolitical assessments

54.3%

Global/systemic financial crises

30.5%Intellectual capital assessments

13.9%

Potential future pandemics

11.9%

Other (please specify) 4.6%
No change expected 2.0%

Source: Arthur D. Little, Invest Europe

Source: Arthur D. Little, Invest Europe

20

17

R E P O R T : T H E I N S I G H T: S T A T E O F T H E E U R O P E A N P R I V A T E E Q U I T Y I N D U S T R Y

5 . R E G U L AT I O N D R I V E S E S G T R E N D S& I N V E S T O R E X P E C TAT I O N S

Europe’s lead in developing robust regulation

While ESG is perhaps the most significant issue

on sustainable investment is creating an

for the European PE industry, other regulatory

important shift in GP positioning and investor

considerations are having an impact on firms

expectations. The implementation of the(see Figure 22). Most notable is tax regulation

Sustainable Finance Disclosures Regulation

affecting fund structures and capital income,(SFDR) has led to the majority of LPs expecting

particularly as a looming general election in

GPs to register their vehicles as Article 8 or 9

the UK reignites the debate around carried

green funds, mirrored by the number of GPs whointerest taxation in one of the largest markets.

see LPs expecting them to register funds that

Amendments to fund manager regulation are

target higher levels of social or environmental

seen having a significantly negative impact

benefit.

as well, despite Alternative Investment FundThe demand for green funds, in combination
with the level of measurement and reporting
they require, is having a significant impact onManagers Directive (AIFMD) reforms thatshould have a relatively benign impact on
private equity.

fund managers (see Figure 21). About half ofAt the bottom of the list, limitations to foreign

GPs anticipate a high impact on firm resources,

direct investment (FDI) in Europe and newincluding the creation of dedicated ESG roles,

foreign subsidy rules, along with regulatory

although around a third expect to be able torequirements on portfolio companies’

fulfil their responsibilities with existing staff.

production or processes, which may include

Only a small minority see no change to theiranticorruption measures and new carbon

positioning as a result of SFDR.

taxation, are seen having least impact.

Figure 21. Expected impact on fund categorization and resource
needs due to SFDR
Figure 21. Expected impact on fund categorization and resource needs due to SFDRGP

Shift in expectations from LPs perfund categorization under SFDR

Yes, to a certain extent; there isan increasing expectation from
LPs to register our funds as
Article 8 or 9 (“green” funds)
Not yet, but not sure this willchange in the near future
Yes, very much so; LPs no longer
wish to invest in Article 6 funds

GP

58.7%
20.3%
12.6%

Implementation of SFDR’s
impact on firm resourcesHigh impact; including
dedicated personnel

LP

49.7%

Moderate impact; without
dedicated personnel

29.4%

Low impact; all resourceswere in place already9.8%

No, and don’t think
this will change

4.9%

Difficult or too early toassess; we are still in
preparatory phase

6.3%

Not subject to SFDR

3.5%

Not subject to SFDR

4.9%

Implementation of SFDR’s
impact on firm resources

Yes, to a certain extent; weincreasingly expect GPs toregister their funds as Article
8 or 9 (“green” funds)

55%

Not yet, but sure thiswill change in the near future

26%

No, and don’t think
this will change
Yes, very much so; we nolonger wish to invest in
Article 6 funds

16%

3%

Source: Arthur D. Little, Invest Europe

18

Source: Arthur D. Little, Invest Europe

21Figure 22. Regulatory issues ranked in terms of negative impact ofbusiness operations

ARTHUR D. LITTLE

Figure 22. Regulatory issues ranked in terms of negative impact of business operations

GP
Tax regulation on fund structures
and/or capital income

34%

Fund-manager regulations(AIFMD, ELTIF, etc.)
Limitations to institutional
investor access to venture& PE investments

28%

29%
14%

Regulations prescribing
sustainability-related
disclosures1

11% 7%

FDI limitations in Europe2

8%

29%

15%

14%

11%

11%

13%

Various regulatory requirementson portfolio companies’
5% 9% 8%production/product or processes

21%

17%

3

7% 4%

15%

11%

19%

38%
2

12%

43%
20%

16%

1 (most negative)

20%
31%

27%

10% 4%3%

4

15%
24%

5

6 (least negative)

Notes: (1) Capital requirements for banks, solvency demands for insurance companies, national investment rules for pension funds; (2) national FDI regimes,
EU rules on foreign subsidiaries
Source: Arthur D. Little, Invest Europe

Notes: (1) Capital requirements for banks, solvency demands for insurance companies, national investment rules for pension funds; (2) national FDI regimes,
EU rules on foreign subsidiaries
Source: Arthur D. Little, Invest Europe

22

19

R E P O R T : T H E I N S I G H T: S T A T E O F T H E E U R O P E A N P R I V A T E E Q U I T Y I N D U S T R Y

6 . D I G I TA L I Z AT I O N AT F O R E F R O N T
O F I N C R E A S I N G O P E R AT I O N A L F O C U S

The difficult business backdrop is increasing

companies, followed by measures to drive organic

GPs’ focus on portfolio companies (see Figure

growth. Cost-efficiency remains critical, as does

23). Two-thirds of managers expect to enhanceacquisition-led growth — albeit at a lower level

operational support and development at theirthan last year as firms contend with increased

businesses, an uptick over last year’s result.

market pressures. Sustainability initiatives have

Next, comes a focus on portfolio company

dropped down the list, potentially reflecting

exits, another clear signal that GPs see somethe already strong progress made on ESG at

improvement in the exit environment and that

portfolio companies, and the relative increase inoperational activities may be key to getting

importance of GP-level measures to comply withcompanies exit ready. Moderately more GPs

regulation and investor expectations.

expect to spend more time on originating
proprietary investments over the coming year.

“Operational improvement has never been

The main improvement initiatives remain largely

we can pull to drive top-line and bottom-line

unchanged from last year (see Figure 24). Two-

performance at our companies.”

more important. There are any number of levers

thirds of GPs see digitalization as the mostBill Watson, Managing Partner,

important initiative to be undertaken at portfolio

Value4Capital

Figure 23. Main focus areas (next 12 months vs. last 12 months)

Figure 23. Main focus areas (next 12 months vs. last 12 months)
2023

GP

More

Operational development of/support to portfolio companies

Same

More

Less

66%

34%

1%

Exit of portfolio companies

55%

36%

9%

Proprietary origination

51%

45%

4%

Regulatory, compliance &IR communication tasks

31%

65%

3%

Risk assessment in
portfolio companies

31%

69%

1%

Due diligence

25%

72%

3%

0%

2022

GP

20%

40%

60%

80%

100%

Operational development of/support to portfolio companies

Less

56%

Deal origination

42%

Exit of portfolio companies

35%

Regulatory, compliance &IR communication tasks

30%

Acquisition assessment& due diligence

25%
0%

Same

20%

43%

7%

51%

18%

47%
68%

2%
7%

68%
40%

60%

1%

80%

100%

Source: Arthur D. Little, Invest Europe

20

Source: Arthur D. Little, Invest Europe

23Figure 24. Most important improvement initiatives

ARTHUR D. LITTLE

Figure 24. Most important improvement initiatives
GP

2023

GP

Digitalization

65.0%

Organic growth

Digitalization

57.3%

Organic growth

Cost reduction

53.8%

Cost reduction

Acquisition-led growth52.4%

Acquisition-led growthGeographic expansion

36.4%

Geographic expansion

Sustainability

33.6%

Sustainability

Customer retention

24.5%

Liquidity financing
Right sizing

18.9%
14.0%

2022
68.6%
59.7%
49.2%
60.5%
48.4%
52.4%

Customer retention
Liquidity financing
Right sizing

24.2%
13.7%
8.9%

Source: Arthur D. Little, Invest Europe

Source: Arthur D. Little, Invest Europe

24

21

R E P O R T : T H E I N S I G H T: S T A T E O F T H E E U R O P E A N P R I V A T E E Q U I T Y I N D U S T R Y

CONCLUSION

The outlook for Europe’s economy remains
challenging with little sign of improvementon the near-term horizon. The message from
central bankers that interest rates will stayhigher for longer than previously anticipated

E U R O P E I S I N C R E A S I N G LY
S TA N D I N G O U T F R O M T H E
REST OF THE WORLD

aims at dampening the remnants of inflation.
The almost inevitable consequence will beeconomic slowdown.

A broadening of the PE investor base toYet, while the macroeconomic backdrop is

mainstream retail clients, will create moreweighing on PE and VC activity — as well as GP

practical challenges, such as generatingand LP sentiment — there are plenty of signs

periodic liquidity, as well as more scrutiny. But

for optimism. A short-term decline in investor

it will also unlock new capital for which PE firms

appetite for private equity does not equate tohave clear plans and plentiful opportunities.

a reversal. Over time, the European PE industry
should continue to grow as long-term investors
seek out assets that can generate superior
returns to support Europe’s pensioners andInvestment in renewable energy infrastructure
and technology, life sciences, deep tech, andagribusiness are all top targets. These sectors

savers.

align with Europe’s broader policy ambitions

It is not only returns that shape the narrative forbusinesses, entrepreneurs, and leading researchprivate equity’s future, but also the industry’s

institutions across the continent. Private

growing green credentials. GPs and LPs appear

equity and venture capital is well positioned

in sync with each other, as well as regulation,and prepared to be catalysts for Europe’s green

which is pushing private equity to consider its

transition and future economic success.

impact on people and the environment, on topof any purely financial considerations. In thisregard, Europe is increasingly standing out
from the rest of the world.

22

individual investors, particularly more

and play to the deep skillset available among

ARTHUR D. LITTLE

P R E VI O U S ED I T I ON S
2020 — “The Insight: Europe’s Private Equity Industry During COVID-19 and Beyond”
2021 — “The Insight: How Europe’s Private Equity Industry Is Anchoring Long-Term Investors”
2022 — “The Insight: Keeping an Eye on the Horizon”

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