Is it a bad time to get into PE?
Hi y’all. I am a first year analyst at a BB and I have recently began to question whether or not now is a good time to get into Private Equity. I’ve seen recent developments occur and would love input from y’all and those in PE.
I have been seeing that the industry has been having some trouble. PE M&A is at an all time low presumably due to the interest rate environment. Due to that, there is a lot of dry powder that has accumulated in a lot of funds. Because of that, LPs are growing their concerns seeing that their money is just sitting and not being deployed. Similarly, there are growing concerns about systemic risk in PE. I recently read how Apollo, for example, is receiving loans from insurers that are within their own portfolio. In other words, Apollo is betting against itself (correct me if I am wrong with any of this). I believe part of this reason is because now PE firms are not getting favorable loans from the large banks. I know that Private Credit has been seeing a surge recently due to this but it all makes me wonder how the bill will be paid.
My hypothesis (and please correct and tweak where I may be wrong): Private Equity is reaching a point where the industry is seeing a lot more risk in accumulating a lot of debt in a non-zero interest rate environment. This debt was very cheap in the 2010-2019 (and post covid) bull markets but now is seeing profitability shrink and stalling in the M&A markets (buyers don’t want expensive debt either). If the fed does not lower rates again, there may be some major restructuring that needs to take place.
Which loops to my original question, is this a good time to enter PE? I’m probably missing a lot which is why I wanted to put this on this form and see what you all thought of the recent developments, especially those in PE.
*as noted I’m literally a new college grad in first year of BB and I’m not pretending to know everything
Bump
Private equity will be fine.
KKR was founded in the 70s and survived 15%+ interest rates in the 80s. Look where they are today.
Every industry goes through cycles, changes, and disruption. Will PE firms need to be more mindful of leverage in a higher interest rate environment? Of course, but they will just change their strategies. Firms are now placing greater emphasis on other areas of value creation (e.g. operational improvements).
One thing I will point out, if it makes any significant difference at all, is that interest rates post 80s had a constant pattern of falling until they hit zero in 2009. Essentially as an investor, you could bet that debt in the future will be cheaper than debt today, expanding multiples and driving overall markets up.
Now I understand that KKR has been doing this for years, however if you look at most of the KKR’s of the world today, a lot of them have been around forever, but their growth really took off starting in 2010 when rates hit and sustained zero. The ability to take out really cheap debt makes it very easy to expand and gather more AUM.
With interest rates at what they are currently at, you are right that PE firms will have to certainly change their strategy, but that won’t mean their growth won’t slow. If the fed decides to cut rates again, which they are signaling cuts in 2024, then they may be able to continue to grow with a similar trajectory as stated above.
Complete BS argument; how many AUM had KKR in the 80s? 25 MN? It was the start of a whole new businesses and there were a handful of firms doing so.
Thus there were tons of opportunities to make $$$ given the fact that not a lot of capital was chasing private firms. Fast forward to todays worlds with dozens of PE firms and ~$ 4 TN (!) in dry powder. This ultimately means higher purhchase multiples & lower returns.
I think going forward PE will be a much more commoditized industry such as asset management. There will always be PE funds but the boom times are over.
KKR wrote a $2bn equity check in RJR Nabisco in the 80s. So I’m guessing their AUM back then was > $25 million.
More broadly, the industry is maturing, returns are compressing, but it’s still an asset class very much in demand and a VERY HIGH quality business that’s super profitable for the investment staff. So decent place to have a career if you enjoy it.
As someone who will be joining a PE firm in August, my perspective may be biased, but my question for you is: why are you making a 40-year career decision based on the past couple of years? You should instead be thinking about what you want to do and what you’re interested in. If the private equity industry will go downhill as many, including you, prognosticated, what other industries would present you with better income trajectory? If there’s another industry on the rise like PE in the 80’s, which career path will best position you for that industry?
To me, private equity still presents the best opportunity. To the first question, I don’t think a lot of industries would provide the same level of risk adjusted wealth generation as PE. Starting a business, either bootstrapped or raising institutional capital like a startup is hard. Hedge funds have experienced their own up and downs although I’ve always wanted to try it out maybe after my associate stint. Even during PE downturns, I’m sure some funds will outperform, and even if you’re not fortunate enough to be working at those funds, your base + bonus will still put you comfortably in the upper echelon of society. Don’t think there’s any other industry except for hedge funds that offer this kind of rewards.
To the second question, capitalist societies will always need people with financial skills and company management skills. Where else can you best develop these skills? It seems pretty obvious to me. Wherever the next big opportunities are, it’s the people who have those skills and are at the forefront who can take advantage (like the bankers that started PE or PC fwiw).
What if private equity does go on and continue to outperform in the next decade? If you want argue about trajectory of interest rates, they have historically trended downward since the beginning of interest, due to better information, regulatory, risk management etc. How will you then pivot back into PE after you miss the train? I think it’s stupid albeit somewhat understandable that this industry is so exclusive, but you want to give yourself enough optionality.
Lastly, it’s impossible to predict the future. While I also like to daydream about my future carry or HF PnL, I think it’s more important to focus on yourself and do things one step at a time instead of basing a career decision on some simple extrapolation because I know what you’re thinking - you’re thinking about the carry package is not gonna be as big as before.
the big players won't fall and will continue to do fine in the next decades, the ones that are at a higher risk are the PE funds in the middle and lower end.
Journalism likes to spread panic about how an entire industry is at risk of disappearing because the more extreme the take the more attention it gets. The 80s/90s/00s/08/10s had their own economical challenges and look where are many of those banks and funds that journalists were already preparing a postmortem for them back in the days.
You clearly have no idea what NAV loans are. So yes, you have no idea what you are talking about with Apollo
OP - I appreciate you pointing out NAV loans. Did a quick look and I can see why and how risk is adjusted by both the lender and the GP. It seems as a good short term solution, but what would happen if liquidity concerns continue to occur? Do firms keep ramping on NAV loans?
(I’m not a first year associate in PE so if you could help explain that’d be great)
PE only want diverse candidates so there is no point trying
It’s important to understand the difference between cyclical, structural, and secular headwinds.
If you’re charting a 25 year career, you need to understand all of the above.
If you’re charting the next elite credential you’re trying to get, you’re totally fine so long as you go to a well known PE firm and the brand carries.
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