1、THE INSIGHT:STATE OF THE EUROPE AN PRIVATE EQUIT Y INDUSTRYAre we at a turning point?4th editionI N PA R T N E R S H I P W I T H:2023CONTENTINTRODUCTION 31.FUNDRAISING MOMENTUM WEAKENS 62.CHALLENGING CONDITIONS IMPACT INVESTMENT 103.DIVESTMENT ROUTES CHANGING 144.INFLATION&INTEREST RATES CREATE LARG

2、EST HEADWINDS FOR PRIVATE EQUITY 165.REGULATION DRIVES ESG TRENDS&INVESTOR EXPECTATIONS 186.DIGITALIZATION AT FOREFRONT OF INCREASING OPERATIONAL FOCUS 20CONCLUSION 22ARTHUR D.LITTLEJONAS FAGERLUND Partner,Sweden GUILLAUME PICQPartner,France INVEST EUROPEJULIEN KRANTZResearch Director julien.krantzi

3、nvesteurope.euGeneral disclaimerADLs conclusions are the results of the exercise of its best professional judgment,based in part upon materials and information provided to ADL by Invest Europe,secondary research,and expert interviews conducted by ADL.Use of this Report by any third party for whateve

4、r purpose should not,and does not,absolve such third party from using due diligence in verifying the Reports contents.Any use that a third party makes of this document,or any reliance on it,or decisions to be made based on it,are the responsibility of such third party.Neither ADL nor Invest Europe a

5、ccepts any duty of care or liability of any kind whatsoever to any third party,and/or any responsibility for damages,if any,suffered by any third party as a result of decisions made,or not made,or actions taken,or not taken,based on this document.2There has been no let up in pressure in 2023,with pe

6、rsistent inflation,rising interest rates,and ongoing geopolitical issues weighing on Europes 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.Littl

7、e(ADL)and Invest Europes European PE survey,combined with Invest Europes first half activity data,takes a clear look at the evolution of fundraising,investment,and divestment in the first six months of the year and gathers fund manager and investor views on the short-and medium-term outlook for acti

8、vity.The survey also investigates the challenges and opportunities that have the potential to shape Europes PE and VC industry further into the future.Fundraising,investment,and divestment totals slowed in the first half of 2023,coming off high levels in 2022 namely,record levels of fundraising and

9、the second-strongest 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 out

10、look 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 invest

11、ment.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.INTRODUC TIONARTHUR D.LITTLE3Also on display is the openness of European PE and VC to new

12、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 sma

13、ller 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 Europes regulatory framewor

14、k on sustainability,as well as investor expectations.While the data and survey highlight the short-term pressures facing the industry,they also demonstrate private equity and venture capitals evolution.Over the medium and longer term,the industry is positioning itself to be more sustainable,while op

15、ening up to a broader investor base putting it evermore firmly at the heart of Europes green transition and bringing the benefits of PE performance to more of Europes citizens.4REPORT:THE INSIGHT:STATE OF THE EUROPEAN PRIVATE EQUIT Y INDUSTRYARTHUR D.LITTLE51.FUNDR AISING MOMENTUM WE AKENSPE fundrai

16、sing slowed in the first half of 2023,coming off record levels achieved during 2022,as a mix of high inflation,rising interest rates,economic uncertainty,and protracted conflict in Ukraine all weighed on Europes economy.Invest Europes preliminary data shows that funds raised 33 billion from investor

17、s in the first half,a decline of 63%on the prior six months.There is a degree of cyclicality in fundraising with European PE firms having taken advantage of the recovery in 2021 and momentum into 2022 to raise capital.Furthermore,a reduction in the number of exits and a subsequent weaker distributio

18、n of capital back to investors have led to more practical constraints to the redeployment of capital into funds.That said,it was not an equal picture across Europe(see Figure 1).Fundraising by France&Benelux funds remained resilient,largely in line with recent performance.At a lower level,DACH(Germa

19、ny D,Austria A,and Switzerland CH)and Southern Europe fundraising was also solid.In contrast,funds raised by UK and Ireland private equity contracted sharply,illustrating the regions role as a home for many pan-European managers,and the greater impact of global conditions.Nordic funds capital raisin

20、g also slowed notably,reflecting a natural slow-down after a record year with large commitments to some large fund managers.In the midst of a deteriorating macroeconomic outlook,GP and LP expectations point to the continuation of challenging fundraising markets ahead,albeit with several bright spots

21、 and opportunities(see Figure 2).While 80%of GPs surveyed expect weaker or neutral fundraising in the coming 12 months,the remaining 20%see stronger levels in the year to come.Although weak,the sentiment still reflects an improvement on 2022,indicating a bottoming of fundraising conditions.Figure 1.

22、Funds raised by European PE and VC fundsSource:Investing in Europe:Private Equity Activity H1 2023,Invest EuropeSource:Investing in Europe:Private Equity Activity H1 2023,Invest EuropeFigure 1.Funds raised by European PE and VC funds0102030405060708090 bn39102320.4H1-2020185731H2-20201852131H1-21225

23、1H2-2134247142.40.33H1-224611521201H2-2271553409H1-23575469628189336UK&IrelandFrance&BeneluxDACHNordicsSouthern EuropeCentral&Eastern Europe(CEE)Figure 2.GPs fundraising expectations(next 12 months vs.last 12 months)Source:Arthur D.Little,Invest EuropeSource:Arthur D.Little,Invest EuropeFigure 2.GPs

24、 fundraising expectations(next 12 months vs.last 12 months)2219.9%53.3%30.5%21.6%41.7%49.7%72.4%0%20%40%60%80%100%20236.0%20225.0%2021WeakerNeutralStrongerGP6REPORT:THE INSIGHT:STATE OF THE EUROPEAN PRIVATE EQUIT Y INDUSTRYARTHUR D.LITTLEAs shown in Figure 3,longer-term expectations on allocations t

25、o the asset class have softened modestly from 2022,as the prospect of higher interest rates for longer increases headwinds for companies,while also giving investors other options in their hunt for yield.Nonetheless,almost nine out of 10 LPs expect capital allocations to private equity to stay the sa

26、me or improve over the next three years,illustrating investors belief in the potential for private equity to continue to deliver outperformance.“Higher interest rates and therefore higher bond yields do give investors new options for yield.However,there will always be a place for private equity in t

27、he portfolio simply because few other investments can generate that kind of alpha.”Frank Amberg,Managing Director,Head of Infrastructure Germany,AltamarCAMIn a shifting fundraising landscape,increasing numbers of GPs are attracted by the opportunity to raise funds from wealthy individuals(see Figure

28、 4).Some 85%of fund managers are interested in raising capital from ultra-high-net-worth individuals,reflecting their sophistication and appetite for illiquid assets,as well as the potential for GPs to cater for a relatively small pool of investors.However,the number of firms also considering“mass a

29、ffluent”clients with assets in the 100,000 to 500,000 range increased sharply to over half,indicating a desire to tailor products to a broader investor base.Less than one in five are drawn to the smaller retail client space,where challenges include the need for products with more liquidity and poten

30、tially different fee structures,as well as greater scrutiny and more regulation.Investors increased focus on generating social and environmental value is evident in the funds they intend to back(see Figure 5).Almost a third expect to allocate more resources to impact funds over the coming 12 months

31、versus just 2%that expect to allocate less.The influence of the growing private market funds universe is also evident,giving LPs greater ability to navigate more difficult markets via their commitments.Almost a quarter anticipate allocating more to secondaries funds,while some 20%foresee a higher al

32、location to both growth and credit funds,as higher interest rates create opportunities for those involved in lending,as well as managers that avoid,or use minimal debt,in their investment models.It is important to note that only a minority of investors expect to allocate less to any private market s

33、trategy over the coming 12 months.Figure 3.LPs capital allocations to PE asset class in next three yearsSource:Arthur D.Little,Invest EuropeSource:Arthur D.Little,Invest EuropeFigure 3.LPs capital allocations to PE asset class in next three years30%20%40%60%80%100%11.2%69.7%19.1%9.7%63.9%26.4%2.4%38

34、.8%58.8%LessSameMore2023LP20222021Figure 4.Interest level to market future funds to wealthy individuals,irrespective of regulatory barriersSource:Arthur D.Little,Invest EuropeSource:Arthur D.Little,Invest EuropeFigure 4.Interest level to market future funds to wealthy individuals,irrespective of reg

35、ulatory barriers4GP20222023GP85%51%17%11%70%37%16%22%Ultra-high-net-worth clients“Mass-affluent”clientsSmaller retail clientsNot of interest7The rapid rise of ESG issues up the agenda is also clear in the differentiating factors that investors will look for in managers(see Figure 6).Three-quarters o

36、f GPs believe that a strong approach to ESG will be critical for firms to stand out in their quest to attract capital,also highlighting Europes leadership role in sustainable investing and the regulation that shapes it.Importantly,ESG considerations move past a GPs track record which remains a stron

37、g second differentiator and investment strategy,which moves down the agenda.THREE-QUARTERS OF GPs BELIEVE THAT A STRONG APPROACH TO ESG WILL BE CRITICAL TO STAND OUTFigure 5.Expected changes in investment strategy allocations(next 12 months vs.last 12 months)Source:Arthur D.Little,Invest EuropeFigur

38、e 6.Most important factors for PE firm differentiation within market in next two to three years Source:Arthur D.Little,Invest EuropeSource:Arthur D.Little,Invest EuropeFigure 5.Expected changes in investment strategy allocations(next 12 months vs.last 12 months)530.3%23.6%20.2%19.1%15.7%14.6%11.2%67

39、.4%71.9%70.8%74.2%66.3%77.5%79.8%86.5%82.0%9.0%18.0%7.9%9.0%7.9%12.4%0%10%20%30%40%50%60%70%80%90%100%2.2%Impact funds4.5%Secondaries asset fundsGrowth funds6.7%Credit fundsVenture fundsBuyout fundsInfrastructure funds5.6%Distressed asset funds5.6%Real estate fundsLPLessSameMoreSource:Arthur D.Littl

40、e,Invest EuropeFigure 6.Most important factors for PE firm differentiation within market in next two to three years 674%69%51%47%15%7%51%72%70%47%19%7%Approach to ESGPast performance/returnInvestment strategyPartner team experienceDiversity,firms value&inclusionOtherGP20222023GP8REPORT:THE INSIGHT:S

41、TATE OF THE EUROPEAN PRIVATE EQUIT Y INDUSTRYARTHUR D.LITTLE9PE investment weakened in the first half of 2023,as difficult financing conditions and uncertainty around valuations weighed on PE and VC deployment.Invest Europes preliminary data shows that total investment levels fell by 47%on the previ

42、ous 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 leveraged buyouts were most affected by the more challenging environment.Growth investments declined in number,but more so in investment v

43、olume,as funds exercised relative caution around some larger funding rounds for fast-growing and scaling businesses.VC funding slowed at the lowest rate in terms of capital invested,underlining Europes robust and vibrant start-up scene,which is continuing to produce and fund early-stage success stor

44、ies across fields,including deep tech,climate tech,and biotech.More difficult conditions are impacting GP optimism regarding investment opportunities(see Figure 8).Just one in five anticipate a stronger investment environment over the next 12 months,down 10 percentage points from last year,and more

45、than 30 points below 2021 levels.The corollary is that 50%of managers now see a weaker outlook for investments over the next year.“The investment outlook is and will remain challenging,until such time as visibility improves and buyer and seller valuation expectations align.”Dariusz Pietrzak,Partner,

46、Enterprise Investors2.CHALLENGING CONDITIONS IMPAC T INVESTMENTFigure 7.Investments by stage in value and volumeLS=left scale;RS=right scale Source:Invest EuropeLS=left scale;RS=right scaleSource:Invest EuropeFigure 7.Investments by stage in value and volume701,0002,0003,0004,0005,000010203040506070

47、8016306H1-20110316H2-203203611H1-211174911H2-211183911H1-22111417H2-22 bn6206H1-23No.of companies048697769603243-47%Venture(RS)Growth(RS)Buyout(RS)Other(LS)Growth(LS)Buyout(LS)Venture(LS)Figure 8.Perception of investment opportunities in market(next 12 months vs.last 12 months)Source:Arthur D.Little

48、,Invest EuropeSource:Arthur D.Little,Invest EuropeFigure 8.Perception of investment opportunities in market(next 12 months vs.last 12 months)819.9%29.9%51.7%30.5%28.4%40.8%49.7%41.8%0%20%40%60%80%100%202320227.5%2021WeakerNeutralStrongerGP1 0REPORT:THE INSIGHT:STATE OF THE EUROPEAN PRIVATE EQUIT Y I

49、NDUSTRYARTHUR D.LITTLEWhile expectations for near-term activity have weakened,the European PE and VC industry is in a strong position.European capital under management(CUM)stands at a record of more than 1 trillion with dry powder of 348 billion,spread across all regions(see Figure 9).Those reserves

50、 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 investment that can support existing companies in their growth.Despite a weak investment outloo

51、k,pressure on GPs to return cash to investors that need liquidity will be a key factor shaping activity in the remainder of 2023 and into 2024(see Figure 10).Over half of GPs expect more secondary buyouts and investments compared to last year.In more challenging markets,GPs have turned to GP-led sec

52、ondaries to generate liquidity and bring in new capital to invest in portfolio companies an approach that also enables them to hold businesses for longer,thereby creating greater value and ultimately maximizing returns.RENEWABLE ENERGY AND LIFE SCIENCES&HEALTHCARE CONTINUE TO TOP THE LIST OF MOST AT

53、TRACTIVE SECTORSEuropean PEs focus on sectors that can accelerate the continents energy transition and improve citizens health is undiminished,in spite of tougher conditions.Renewable energy and life sciences and healthcare continue to top the list of most attractive sectors,with only modest change

54、in their levels of absolute appeal to managers(see Figure 11).At the same time,the attraction of transformative technology and innovative food production techniques are high on rankings,especially deep tech,which has moved up by more than 10 percentage points.Both deep tech and agribusinesses likely

55、 are driven by a growing technology content as well as opportunities to automate production processes.Business services is still a hot area as companies are increasingly becoming more reliant on managed services solutions of different sorts.Figure 9.PE and VC firms capital under management,2022 Note

56、: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)and not yet divested opposed to asset under management(AUM),which refers to total market value of all financial assets managed by

57、an investment firmSource:Invest Europe,EDCNote: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)and not yet divested opposed to asset under management(AUM),which refers to total ma

58、rket value of all financial assets managed by an investment firmSource:Invest Europe,EDCFigure 9.PE and VC firms capital under management,2022948%112=Capital under management(CUM)=Dry powder(DP)23837%50729%NordicsUK&IrelandCEESouthern EuropeFrance&BeneluxDACH1136%8540%5140%CUM 1,004 bnDP348 bn1 1Ind

59、ustries exposed to higher interest rates and 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 2022s survey(see Figure 12).In contrast,fewer r

60、espondents see the automotive and consumer goods and retail sectors 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 majori

61、ty of respondents believe they will have a limited impact on private equitys 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.ONGOING GEOPOLITICAL TENSION IS

62、 NOT ONLY RESHAPING THE LANDSCAPE IN EUROPE AND GLOBALLY,BUT ALSO INTEREST AND DEMAND IN MILITARY AND DEFENSE-RELATED INVESTMENTSFigure 10.Expected changes in PE transaction market(next 12 months vs.last 12 months)Source:Arthur D.Little,Invest EuropeSource:Arthur D.Little,Invest EuropeFigure 10.Expe

63、cted changes in PE transaction market(next 12 months vs.last 12 months)10GP54%35%33%27%37%48%61%54%73%9%17%19%24%0%20%40%60%80%100%Secondary marketPrimary market6%Corporate spinoffsPublic-to-private deals3%State-owned(privatizations)LessSameMoreFigure 11.Expected investment operation activity levels

64、 per top five target sectors compared to last 12 monthsSource:Arthur D.Little,Invest EuropeSource:Arthur D.Little,Invest EuropeFigure 11.Expected investment operation activity levels per top five target sectors compared to last 12 months110%20%40%60%80%100%3.9%32.7%63.5%Renewable energy6.1%40.0%53.9

65、%Life science&healthcare19.8%48.5%31.7%Deep tech9.1%50.5%40.4%Agribusiness9.9%57.9%32.2%Business services60.2%50.0%43.1%41.4%40.7%34.0%49.1%42.2%50.5%55.6%0%20%40%60%80%100%5.8%Renewable energy0.9%Life science&healthcare14.7%Deep tech8.1%Agribusiness3.7%Business servicesGP20232022GPHigherSameLowerHi

66、gherSameLower1 2REPORT:THE INSIGHT:STATE OF THE EUROPEAN PRIVATE EQUIT Y INDUSTRYARTHUR D.LITTLEOngoing geopolitical tension is not only reshaping the landscape in Europe and globally,but also interest and demand in military and defense-related investments.Respondents see more opportunities in that

67、sector,particularly in dual-use technologies that have both military and civilian applications(see Figure 14).Interestingly,LP and GP opinions are in lockstep and indeed even closer than they were last year,as both groups rethink their boundaries on potential ESG exclusions and consider the increase

68、d importance of national security and sovereignty.Figure 12.Expected investment operation activity per bottom five target sectors compared to last 12 months Source:Arthur D.Little,Invest EuropeFigure 13.Impact of interest rate changes on ability to finance upcoming acquisitions Source:Arthur D.Littl

69、e,Invest EuropeFigure 14.Change in willingness to consider investments into military-or defense-related sectors Source:Arthur D.Little,Invest EuropeSource:Arthur D.Little,Invest EuropeFigure 12.Expected investment operation activity per bottom five target sectors compared to last 12 months 122023202

70、2GPGP0%20%40%60%80%100%39.1%53.3%7.6%Real estate57.4%37.6%5.0%Automotive53.2%36.0%10.8%Consumer goods&retail21.9%68.8%9.4%Chemicals17.3%64.4%18.3%Financial services22.0%35.6%48.4%50.4%69.9%62.4%59.8%41.9%35.8%22.6%0%20%40%60%80%100%4.6%Real estate9.7%Automotive13.8%Consumer goods&retail7.5%Chemicals

71、15.6%Financial servicesHigherSameLowerHigherSameLowerSource:Arthur D.Little,Invest EuropeFigure 13.Impact of interest rate changes on ability to finance upcoming acquisitions 1336%54%9%35%57%8%Significant impactLimited impactNo impactGP20222023GPSource:Arthur D.Little,Invest EuropeFigure 14.Change i

72、n willingness to consider investments intomilitary-or defense-related sectors 14LPGP17%67%11%18%69%8%Yes,but only into dual-usegoods&technologies(civilian&military)5%6%Yes,into goods&technologies specificallyfor military use No,willingness is thesame as beforeNo,willingness islower than before10%74%

73、14%13%7%72%8%2%202220231 3In parallel with other measures of activity,preliminary data from Invest Europe shows that divestment slowed in the first half,down by 45%on the previous six months to 9 billion.By number of transactions,exits across all segments also fell to lower levels.The uncertain econ

74、omic outlook,higher interest rates,and geopolitical tensions are all creating pressure on the divestment market,leading to a disconnect between buyer and seller valuations and expectations.As holding periods lengthen,and it becomes more common for PE firms to own successful businesses for the long t

75、erm,the data indicates that,for many managers,the best option may be to continue to own the business(see Figure 15).Doing so,they can seek to continue to drive value through operational improvements,while waiting for market conditions to pick up in order to maximize exit value for investors.UNCERTAI

76、N ECONOMIC OUTLOOK,HIGHER INTEREST RATES,AND GEOPOLITICAL TENSIONS ARE CREATING PRESSURE GP expectations for the divestment outlook remain low as the threat of economic downturn weighs on companies across the continent(see Figure 16).Only 20%expect a stronger exit environment over the coming 12 mont

77、hs compared to almost double that number expecting a weaker outlook.While sentiment is notably less optimistic than in 2021 in the post-COVID-19 economic recovery,expectations have picked up since last year with those expecting a stronger divestment scene doubling.3.DIVESTMENT ROUTES CHANGINGFigure

78、15.Divestments by stage in value and volume LS=left scale;RS=right scale Source:Invest EuropeFigure 16.Expected changes in divestment of portfolio companies(next 12 months vs.last 12 months)Source:Arthur D.Little,Invest EuropeLS=left scale;RS=right scaleSource:Invest EuropeFigure 15.Divestments by s

79、tage in value and volume 1501002003004005006007008009001,000051015202530No.of companies0271H1-2013102H2-2014131H1-2114202H2-2103112H1-2204111H2-22 bn271H1-2310019261617916Venture(RS)Growth(RS)Buyout(RS)Other(LS)Growth(LS)Buyout(LS)Venture(LS)Source:Arthur D.Little,Invest EuropeFigure 16.Expected cha

80、nges in divestment of portfolio companies(next 12 months vs.last 12 months)1619.9%63.3%43.0%28.4%33.3%37.1%61.9%0%20%40%60%80%100%20239.7%20223.3%2021WeakerNeutralStrongerGP1 4REPORT:THE INSIGHT:STATE OF THE EUROPEAN PRIVATE EQUIT Y INDUSTRYARTHUR D.LITTLEGiven weak levels of divestment over the pas

81、t 12 months,more GPs are expecting an improvement in most exit routes than last year with the exception of management buyouts and buybacks,on which views are largely unchanged(see Figure 17).While only a minority believe that any of the main divestment options will be more common,the largest number

82、and a sizeable minority see more proprietary situations.The challenging conditions mean that many managers will be keen to conclude agreements following preemptive approaches or bilateral off-market discussions,reducing scrutiny on processes while allowing parties more time to conduct due diligence.

83、Nonetheless,the number expecting more divestment activity via auctions and IPOs has also increased,reflecting the relative absence of public listings and large managed asset auction processes over the past year.Both GPs and LPs are in relative agreement over the prospect for continued valuation decl

84、ines over the next 12 months,following some resetting of valuations and expectations during the past year.Opinions diverge somewhat over the expected volume of transactions,with GPs notably more optimistic than LPs.However,expectations for all parties are markedly better than last year,potentially p

85、ointing to a bottoming of the exit market and an uptick in divestments.Figure 17.Expected changes of exit route for companies under ownership(next 12 months vs.last 12 months)Source:Arthur D.Little,Invest EuropeSource:Arthur D.Little,Invest EuropeFigure 17.Expected changes of exit route for companie

86、s under ownership(next 12 months vs.last 12 months)1737%16%25%54%57%60%10%9%27%87%0%20%40%60%80%100%Proprietary situationsAuctionsManagement/owner buyback3%IPOsMoreSameLess45%28%23%14%50%56%61%25%16%17%61%0%20%40%60%80%100%5%Proprietary situationsAuctionsManagement/owner buybackIPOsMore SameLess 202

87、32022GPGP15%1 54.INFL ATION&INTEREST R ATES CRE ATE L ARGEST HE ADWINDS FOR PRIVATE EQUIT YIn keeping with last year,inflation is the leading concern for private equity GPs,with over 60%ranking it as the most negative,or second most negative,factor impacting the economic outlook the same proportion

88、as LPs who view it as strongly negative(see Figure 18).Opinions diverge on higher interest rates,which about half of LPs rate as the most negative factor versus approximately a quarter of GPs.Both inflation and interest rates are ranked by LPs and GPs as more serious than economic uncertainty and we

89、ll ahead of supply chain disruption,which rated as a more severe issue last year,particularly among GPs,as the world contended with supply issues stemming from COVID-19 and the subsequent normalization of production and trade.Most recently,the impact of banking failures appears to be the least negat

90、ive factor by far,reflecting the swift action by European governments and regulators,as well as the greater concentration of issues in the US regional banking space.“Inflation is not going away without a fight.That and high interest rates will be serious headwinds for private equity for the foreseea

91、ble future.”Elias Korosis,Partner,Federated Hermes GPEWhen it comes to factors that are within the PE industrys control,well over two-thirds of GPs and LPs expect to spend more time on ESG issues and the collection of KPI data points(see Figure 19).More than two-thirds of GPs also anticipate more at

92、tention to diversity and inclusion in their near-term operations,ahead of LPs who may have had more focus on the topic in recent times.The majority of GPs expect to have more focus on all issues,demonstrating their attention to navigating challenging markets and conditions,while addressing rising re

93、gulatory requirements and investor demands.Figure 18.Negatively impacting factors on business operations and performance Source:Arthur D.Little,Invest EuropeSource:Arthur D.Little,Invest EuropeFigure 18.Negatively impacting factors on business operations and performance 182%1%1%2%24%Higher inflation

94、-LP2%5%13%17%27%35%Higher inflation-GP2%2%8%15%24%49%Interest rate increases-LP1%8%20%19%29%23%Interest rate increases-GP3%4%28%29%16%19%Economic uncertainty-LP1%12%23%23%21%20%Economic uncertainty-GP15%28%24%15%15%4%Supply chain disruption-LP5%24%21%24%11%14%Supply chain disruption-GP13%44%26%9%6%2

95、%Geopolitical instability-LP6%8%20%13%10%6%Geopolitical instability-GP64%19%7%7%45%26%Recent bank failures-LP86%6%3%3%1%38%Recent bank failures-GP2%1(most negative)23456(least negative)1 6REPORT:THE INSIGHT:STATE OF THE EUROPEAN PRIVATE EQUIT Y INDUSTRY16ARTHUR D.LITTLEThe near-term focus of GPs is

96、also evident in the due diligence fields receiving heightened scrutiny.More than three-quarters of managers expect to do more assessments around ESG and cybersecurity(see Figure 20).Consideration of digital maturity at businesses and geopolitical risks will also receive more attention among over hal

97、f of GPs,followed by assessments of global financial risks.Less important are intellectual capital considerations and the threat of future pandemics,although 98%of GPs expect some form of change to their due diligence procedures.“Managing ESG is having a clear impact on our time and resources.Ultima

98、tely,its an opportunity as a way of attracting LP capital,generating new investments,and adding value to companies.”Maaike van der Schoot,Head of Responsible Investment,AlpInvest,a core division of CarlyleFigure 19.Expected changes in near future,daily operations Source:Arthur D.Little,Invest Europe

99、Figure 20.Areas receiving increased attention in future due diligence processes Source:Arthur D.Little,Invest EuropeSource:Arthur D.Little,Invest EuropeFigure 19.Expected changes in near future,daily operations 1980.6%70.9%66.9%60.6%59.4%54.3%19.4%28.6%32.0%39.4%40.6%45.7%0%20%40%60%80%100%0.0%Atten

100、tion to ESG0.6%Collection of KPIsor data points1.1%Attention to diversity&inclusion issuesAttention togeopolitical risk0.0%Investor relationscommunicationtoward LP0.0%Attention to risk managementLP70%70%40%43%33%44%30%30%58%57%66%55%0%20%40%60%80%100%Attention to ESGDemand for KPIsor data pointsAtte

101、ntion to diversity&inclusion issues0%Attention to geopolitical riskInvestor relations communication fromthe GPAttention to risk managementGPMoreSameLessMoreSameLessSource:Arthur D.Little,Invest EuropeFigure 20.Areas receiving increased attention in future due diligence processes2078.1%74.8%55.0%54.3

102、%30.5%13.9%11.9%ESG assessmentsCybersecurity assessmentsDigitalization maturity assessmentsGeopolitical assessmentsGlobal/systemic financial crisesIntellectual capital assessmentsPotential future pandemics4.6%Other(please specify)2.0%No change expectedGP1 7Europes lead in developing robust regulatio

103、n on sustainable investment is creating an important shift in GP positioning and investor expectations.The implementation of the Sustainable Finance Disclosures Regulation(SFDR)has led to the majority of LPs expecting GPs to register their vehicles as Article 8 or 9 green funds,mirrored by the numbe

104、r of GPs who see LPs expecting them to register funds that target higher levels of social or environmental benefit.The demand for green funds,in combination with the level of measurement and reporting they require,is having a significant impact on fund managers(see Figure 21).About half of GPs antic

105、ipate a high impact on firm resources,including the creation of dedicated ESG roles,although around a third expect to be able to fulfil their responsibilities with existing staff.Only a small minority see no change to their positioning as a result of SFDR.While ESG is perhaps the most significant is

106、sue for the European PE industry,other regulatory considerations are having an impact on firms(see Figure 22).Most notable is tax regulation affecting fund structures and capital income,particularly as a looming general election in the UK reignites the debate around carried interest taxation in one

107、of the largest markets.Amendments to fund manager regulation are seen having a significantly negative impact as well,despite Alternative Investment Fund Managers Directive(AIFMD)reforms that should have a relatively benign impact on private equity.At the bottom of the list,limitations to foreign dir

108、ect investment(FDI)in Europe and new foreign subsidy rules,along with regulatory requirements on portfolio companies production or processes,which may include anticorruption measures and new carbon taxation,are seen having least impact.5.REGUL ATION DRIVES ESG TRENDS&INVESTOR E XPEC TATIONSFigure 21

109、.Expected impact on fund categorization and resource needs due to SFDRSource:Arthur D.Little,Invest EuropeSource:Arthur D.Little,Invest EuropeFigure 21.Expected impact on fund categorization and resource needs due to SFDR21GPShift in expectations from LPs per fund categorization under SFDRImplementa

110、tion of SFDRs impact on firm resourcesGPHigh impact;includingdedicated personnelModerate impact;withoutdedicated personnelLow impact;all resourceswere in place alreadyDifficult or too early toassess;we are still inpreparatory phaseNot subject to SFDR49.7%29.4%9.8%6.3%4.9%Yes,to a certain extent;ther

111、e isan increasing expectation fromLPs to register our funds asArticle 8 or 9(“green”funds)Not yet,but not sure this willchange in the near futureYes,very much so;LPs no longerwish to invest in Article 6 fundsNo,and dont thinkthis will changeNot subject to SFDR58.7%20.3%12.6%4.9%3.5%Implementation of

112、 SFDRs impact on firm resourcesYes,to a certain extent;weincreasingly expect GPs toregister their funds as Article8 or 9(“green”funds)Not yet,but sure thiswill change in the near futureNo,and dont thinkthis will changeYes,very much so;we nolonger wish to invest inArticle 6 funds55%26%16%3%LP1 8REPOR

113、T:THE INSIGHT:STATE OF THE EUROPEAN PRIVATE EQUIT Y INDUSTRYARTHUR D.LITTLEFigure 22.Regulatory issues ranked in terms of negative impact of business operationsNotes:(1)Capital requirements for banks,solvency demands for insurance companies,national investment rules for pension funds;(2)national FDI

114、 regimes,EU rules on foreign subsidiariesSource:Arthur D.Little,Invest EuropeNotes:(1)Capital requirements for banks,solvency demands for insurance companies,national investment rules for pension funds;(2)national FDI regimes,EU rules on foreign subsidiariesSource:Arthur D.Little,Invest EuropeFigure

115、 22.Regulatory issues ranked in terms of negative impact of business operations224%10%21%28%34%Tax regulation on fund structuresand/or capital income4%7%12%20%29%29%Fund-manager regulations(AIFMD,ELTIF,etc.)11%15%31%14%15%14%Limitations to institutionalinvestor access to venture&PE investments 43%17

116、%11%11%7%11%Regulations prescribing sustainability-related disclosures115%19%20%27%3%8%FDI limitations in Europe224%38%13%8%9%5%Various regulatory requirementson portfolio companiesproduction/product or processes16%1(most negative)23456(least negative)GP1 96.DIGITALIZ ATION AT FOREFRONT OF INCRE ASI

117、NG OPER ATIONAL FOCUSThe difficult business backdrop is increasing GPs focus on portfolio companies(see Figure 23).Two-thirds of managers expect to enhance operational support and development at their businesses,an uptick over last years result.Next,comes a focus on portfolio company exits,another c

118、lear signal that GPs see some improvement in the exit environment and that operational activities may be key to getting companies exit ready.Moderately more GPs expect to spend more time on originating proprietary investments over the coming year.The main improvement initiatives remain largely uncha

119、nged from last year(see Figure 24).Two-thirds of GPs see digitalization as the most important initiative to be undertaken at portfolio companies,followed by measures to drive organic growth.Cost-efficiency remains critical,as does acquisition-led growth albeit at a lower level than last year as firm

120、s contend with increased market pressures.Sustainability initiatives have dropped down the list,potentially reflecting the already strong progress made on ESG at portfolio companies,and the relative increase in importance of GP-level measures to comply with regulation and investor expectations.“Oper

121、ational improvement has never been more important.There are any number of levers we can pull to drive top-line and bottom-line performance at our companies.”Bill Watson,Managing Partner,Value4CapitalFigure 23.Main focus areas(next 12 months vs.last 12 months)Source:Arthur D.Little,Invest EuropeSourc

122、e:Arthur D.Little,Invest EuropeFigure 23.Main focus areas(next 12 months vs.last 12 months)2366%55%51%31%31%25%34%36%45%65%69%72%9%0%20%40%60%80%100%1%Operational development of/support to portfolio companiesExit of portfolio companies4%Proprietary origination3%Regulatory,compliance&IR communication

123、 tasks1%Risk assessment in portfolio companies3%Due diligenceMoreSameLess56%42%35%30%25%43%51%47%68%68%7%18%7%0%20%40%60%80%100%1%Operational development of/support to portfolio companiesDeal originationExit of portfolio companies2%Regulatory,compliance&IR communication tasksAcquisition assessment&d

124、ue diligence20232022GPGPMoreSameLess2 0REPORT:THE INSIGHT:STATE OF THE EUROPEAN PRIVATE EQUIT Y INDUSTRYARTHUR D.LITTLEFigure 24.Most important improvement initiativesSource:Arthur D.Little,Invest EuropeSource:Arthur D.Little,Invest EuropeFigure 24.Most important improvement initiatives24Digitalizat

125、ionOrganic growthCost reductionAcquisition-led growthGeographic expansionSustainabilityCustomer retentionLiquidity financingRight sizing68.6%59.7%49.2%60.5%48.4%52.4%24.2%13.7%8.9%DigitalizationOrganic growthCost reductionAcquisition-led growthGeographic expansionSustainabilityCustomer retentionLiqu

126、idity financingRight sizing65.0%57.3%53.8%52.4%36.4%33.6%24.5%18.9%14.0%20232022GPGP2 1The outlook for Europes economy remains challenging with little sign of improvement on the near-term horizon.The message from central bankers that interest rates will stay higher for longer than previously anticip

127、ated aims at dampening the remnants of inflation.The almost inevitable consequence will be economic slowdown.Yet,while the macroeconomic backdrop is weighing on PE and VC activity as well as GP and LP sentiment there are plenty of signs for optimism.A short-term decline in investor appetite for priv

128、ate equity does not equate to 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 Europes pensioners and savers.It is not only returns that shape the narrative for private equitys future,but also t

129、he industrys growing green credentials.GPs and LPs appear in sync with each other,as well as regulation,which is pushing private equity to consider its impact on people and the environment,on top of any purely financial considerations.In this regard,Europe is increasingly standing out from the rest

130、of the world.EUROPE IS INCREASINGLY STANDING OUT FROM THE REST OF THE WORLDA broadening of the PE investor base to individual investors,particularly more mainstream retail clients,will create more practical challenges,such as generating periodic liquidity,as well as more scrutiny.But it will also un

131、lock new capital for which PE firms have clear plans and plentiful opportunities.Investment in renewable energy infrastructure and technology,life sciences,deep tech,and agribusiness are all top targets.These sectors align with Europes broader policy ambitions and play to the deep skillset available

132、 among businesses,entrepreneurs,and leading research institutions across the continent.Private equity and venture capital is well positioned and prepared to be catalysts for Europes green transition and future economic success.CONCLUSION2 2REPORT:THE INSIGHT:STATE OF THE EUROPEAN PRIVATE EQUIT Y IND

133、USTRYARTHUR D.LITTLEPREVIOUS EDITIONS2020 “The Insight:Europes Private Equity Industry During COVID-19 and Beyond”2021 “The Insight:How Europes Private Equity Industry Is Anchoring Long-Term Investors”2022 “The Insight:Keeping an Eye on the Horizon”2 3Arthur D.Little has been at the forefront of inn

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