..be very careful if you are invited to invest in private equity. It can be ego boosting because you have the money to be eligible, but once your money goes in, it is locked for years and you could be stuck with subpar returns for longer, and at worse maybe even negative returns if there are forced sales to raise liquidity for redemptions.
..this PE (private equity) is another 'crisis' waiting to happen, on top of CRE (commercial real estate). This PE Standoff Is Running Out of Steam
By Joel Litman, chief investment strategist, Altimetry
Private-equity ("PE") firms are in a panic...
And it's not because they can't keep piling up debt just to reward their investors with dividends.
It's because their business model is breaking.
Normally, these firms raise money from investors and put that cash into "funds." Those funds then go out and buy companies with debt... and spend five to seven years fixing their businesses up.
The PE firm then sells those companies for a higher price – either to the public markets, to a larger industry player, or even to another PE firm.
Of course, PE investors know they can't expect a payday overnight. The fundraising process alone can take up to a few years... And again, it can take up to seven years to improve these debt-laden companies' businesses.
When PE firms eventually do that, and then sell those businesses for a profit, that's when they return cash back to investors... who then happily reinvest it in a new fund.
It's a pretty simple business model. But it's completely falling apart today.
As I'll explain, PE firms have their backs against the wall. They're being squeezed by their investors and potential buyers. And sooner or later, they'll have to accept the inevitable.
Investors in PE funds are getting restless...
Worldwide, PE firms are sitting on a record 28,000 unsold companies. That's worth more than $3 trillion combined.
They simply can't find buyers for their assets, which means it's going to take longer for investors to get their money back.
Ultimately, there's just far less demand for these kinds of companies...
PE-backed IPOs have flopped in recent months. And other companies – such as larger industry players and serial acquirers – aren't willing to buy. Most of them need debt financing to close the deals. And with interest rates still so high, they're waiting for a better price... which they may get.
The combined value of PE-backed companies that were sold either privately or publicly in 2023 fell 44% from the year prior – reaching the lowest level in a decade.
One of the most popular moves of the past several years has been to sell a portfolio company to another PE fund. Yet, even that approach has failed to work. The value of companies sold to other PE firms fell 47% last year due to differing opinions about how much the assets were worth.
And keep in mind, these PE-backed companies aren't in the early stages of their lives... More than 40% of the companies waiting to be sold are at least four years old. That means PE firms should be selling soon.
But nobody's budging. And everybody is getting antsy...
Investors want their money back. They won't put any more cash to work unless they get paid back for older funds.
PE firms want to unload their companies. That's the only way they can start fundraising for the next round of investment vehicles... and pay their investors back for previous ones.
Potential buyers want better deals – especially if they're going to be buying companies that still have debt.
Something has got to give. And in all likelihood, the PE firms will be the ones to crack.
That means mce-anchorPE firms will have to start selling their holdings at discounts... perhaps even for losses.
This will hurt in the short term. It's going to cause investors to panic. And it might even put some PE firms out of business. However, it'll also help break up the current logjam.
And savvy investors on the other side of those transactions are bound to get some great bargains.
