An IMGW Wealth Management News Report
Challenges Ahead for Buyout Firms with Trillions in Assets to Sell
Private equity executives are warning that the industry could face several years of diminished returns as they work to offload assets acquired during a period of intense investment activity spurred by the COVID-19 pandemic.
In recent years, private equity firms have experienced unprecedented growth, amassing record amounts of capital. However, the challenge now lies in exiting investments worth trillions of dollars, many of which were made during the favourable conditions of 2021 and 2022 when interest rates were low and market valuations were high.
Pete Stavros, KKR’s co-head of global private equity, highlighted the difficulty at the SuperReturn industry conference in Berlin, stating, “During that period of time, rates were low and valuations were high. These are going to be tough vintages . . . they’re probably going to underperform.”
Exiting Investments to Return Capital
Private equity funds are under pressure to sell more than $3 trillion worth of companies to return capital to their institutional investors, which include pension funds, sovereign wealth funds, and endowments. Apollo co-president Scott Kleinman compared this challenge to a “pig” in a “python,” indicating that the industry will likely see a few years of lower returns.
Adding to the complexity, fund managers also have $3.9 trillion of unspent capital, or “dry powder,” which they need to deploy in new deals, according to a mid-year report from consultancy Bain & Co. This situation necessitates a shift in strategy, with a focus on deals where funds can enhance operational or strategic aspects to generate profits.
“Over the next five or 10 years, we’ll be able to see extraordinary opportunities in Europe. But that would be an out-of-consensus opinion”
Harvey Schwartz, CEO of Carlyle
Shift in Investment Strategy
Executives at the conference emphasised the need for adaptation. Marc Nachmann, global head of asset and wealth management at Goldman Sachs, remarked that the industry’s previous model of acquiring companies with cheap debt and selling them at a higher price ratio is no longer viable. “For the past 10 years, it was too easy, almost, to generate returns,” Nachmann said. The future will require more nuanced strategies, such as carving out divisions from larger companies or investing in founder-owned businesses.
Market Outlook and Opportunities
The slow pace of deal recovery has also affected returns. The ongoing challenge of agreeing on asset valuations is easing as inflation stabilises and the economic outlook becomes clearer. Despite an anticipated 17 percent rise in private equity-backed sales to $361 billion this year, it would still mark the second-worst year for exits since 2016.
Rebecca Burack, global head of Bain & Co’s private equity practice, noted, “There has been a bottoming out. What there hasn’t yet been is what we’d call a massive recovery.”
Nonetheless, some executives remain optimistic about market opportunities. In a recent report on the Financial Times, Harvey Schwartz, CEO of Carlyle, acknowledged that while rising borrowing costs pose challenges, the current environment is healthier. Schwartz sees potential in markets outside the US, particularly in Japan and Europe, where Carlyle is exploring acquisitions.
“Over the next five or 10 years, we’ll be able to see extraordinary opportunities in Europe. But that would be an out-of-consensus opinion,” Schwartz concluded.
As the private equity industry navigates these challenging times, the focus will be on strategic adaptations and identifying new opportunities in a landscape that no longer supports the easy returns of the past decade.