Private equity faces a rough patch as US fund returns trail the S&P 500 by over three percentage points annually over the past five years. Fund hold times have lengthened to seven years from five a decade ago, while $1.3 trillion in dry powder sits idle, over 40 percent for more than two years. Fundraising is set to decline for the third consecutive year as fees come under pressure from institutional investors demanding co-investment opportunities.
Software buyouts, once PE's favorite industry, head toward restructuring as a debt maturity wall approaches. Shares of dominant alternative asset managers Blackstone, Apollo and KKR have suffered a poor year. One of the biggest evergreen funds for wealthy individuals had to gate redemption requests this summer.
Critics argue the sector is contracting, but the industry maintains it is adjusting to greater institutionalisation, heightened competition, and the law of large numbers. Private equity is no longer an "alternative" asset class. A cyclical downturn and the end of the low-interest-rate era explain much of the current pressure.
In the post-pandemic boom, managers paid high prices and loaded companies with debt; many portfolio companies have not grown as hoped. Financing has reset at higher rates, compressing returns. Managers avoid exiting investments to crystallize poor results, hoping for a profit renaissance or a return to low rates that looks unlikely.
They claim public markets are broken and cannot value their companies properly, though this is described as a fantasy. Beneath cyclical trends lies a secular shift: industry assets under management have grown from $630 billion two decades ago to $6 trillion today. Purchase prices are higher as sellers know their worth, and larger pools of capital make outperforming increasingly difficult.
Higher debt levels can amplify returns if managed outside public markets. The fact that private assets do not trade daily does not in itself mean...
Source: Financial Times Companies · Summarized by HeadlinesBriefing