Is Private Equity Dead?

Andy Kessler, a former Hudge Fund Manager who writes periodically for the WSJ has recently discussed his thoughts on the future of Private Equity. This article discusses how the industry is overflowing with hundreds of firms chasing after the same opportunities such as how will interest rates affect the future of these firms? "Leveraged loans are the lifeblood of private equity," says Mr. Kessler and seeing as most firms borrow the majority of the funds.

Then add the potential of tax reforms to the scenerio that place interest rate deductions on the chopping block and then we lose one major benefit of debt, tax deductions on interest payments, for these firms. In the words of Mr. Kessler, "the interest-tax symmetry is long overdue and makes enough sense that it could end up in future tax reform." He goes on saying that Private equity has actually been hurting the economy and that the future will show that Private Equity will not make it in the end. So how solid is Mr. Kessler's arguement? And are you setting yourself up working towards a job in Private Equity? The answers to those question will unfold in due time so then I will end with his last statement,

"So it’s back to basics—creating companies rather than squeezing the last life out of old ones. Just like Wall Street shrinking and curtailing once-profitable businesses, private equity will begin a slow decline. Yes, we’ll see more deals and even a few successes. But the returns from private equity won’t match those of the past 30 years. And capital will flow elsewhere—let’s hope to productive and wealth-creating segments of the economy."

http://www.wsj.com/articles/andy-kessler-the-glory-days-of-private-equi…

 

There's probably too much PE money chasing too few deals right now and we could use a few less funds out there but it's not the end or even the beginning of a long decline to zero for PE in my opinion. I've worked in the lower to MM most of my career and I've seen a lot more competition for deals and whereas off market deals used to be pretty common they're now more of an exception. Still there, but more difficult to find. There's no doubt the industry has become more mature though but returns are still pretty good compared to other traditional and alt investments and gains are almost always taxed long term. And I don't think interest deductions will go away, but just an opinion. I also don't see anywhere near as many complete explosions of PE funds as there are in the HF space even in the 07-09 years. There are also plenty of PE firms, and I talk about my space not the megafunds or other large cap investors, that do look to grow rather than simply lever and financially engineer.

And then "...let’s hope to productive and wealth-creating segments of the economy." Where is this? VC's so that they can fund another app or something that lets us upload vids of our pets onto social media sites (or better yet snapping a dick pic) more quickly and over inflate the tech bubble even more by investing in later stage VC backed companies so that a taxi alternative is worth more than Kraft or Delta? HF's or other trading strategies so that they can place leveraged bets in the public rather than private market? Plain Jane long only mutual funds or real estate so that those markets get over inflated, again? I am not against any of the above by any means but his statement's a big smug against PE.

I could see trying to expand SME, non-tech sector financing options, both equity and debt, that are overlooked by the VC market. This is where banks should play but they're often too cautious and going the SBA or similar route is just a pain in the ass and takes too long but it's difficult as an investor to navigate that fragmented sector. And if all of the money that he may deem not productive went into more things he deemed worthy it would simply create bubbles in those areas. Unless he wants to give other people's money away to cure world hunger and things like that, which is a nice thought, but most people don't want to give their money away and not expect a return.

 

PE certainly isn't dead, but with the success that 3G has been having without using the traditional LP funding structure and increasing co-investment and direct participation of institutional investors (especially sovereign wealth funds), I definitely see some change coming to the industry for the premier firms.

"The power of accurate observation is commonly called cynicism by those who have not got it." - George Bernard Shaw
 

Agree with @Hugh Myron.

The number of funds has increased in recent years, and the fundraising environment has gotten tougher as a result . As in most developing markets, there is a shift in balance between customer and vendor until reaching an equilibrium point; this has been exhibited by private equity markets recently. Most pensions and other LPs have actively been seeking to make concentrated bets in private equity funds, and in the process are negotiating better economics with GPs. As a result, the success of first-time funds in the market have been impacted and the fundless sponsor model has seen increased adoption. In a perfect world, GPs will only be able to raise money for the next fund if their returns are strong. However, the PE landscape is not perfect, and recent funds have seen fundraising off of paper (yet to be actualized) returns. Eventually the market will become more efficient, but at the moment, there are still a ways to go. That being said, the industry is better positioned then the HF space (in my biased opinion).

Relevant Links: http://dealbook.nytimes.com/2015/02/02/stephen-schwarzman-has-a-warning… http://www.sixpointpartners.com/c/press/surveys/Sixpoint%20Partners%202…)

Play the long game - give back, help out, mentor - just don't ever forget where you came from. #Bootstrapped
 

it's all cyclical. Those who do good will keep raising money. Those who don't but can bs will raise another fund and live another day (and keep living if they do ok, or close up later), those who do poorly and can't market will clip fees on the existing portfolio for as long as possible and die. There will be fewer players in the market and a bunch of funds will make a lot of money. Then a bunch of new firms will form to take advantage of this. and So on and So forth. Note that I haven't gotten into the discussion of policy, economic cycles or anything like that...

Private capital has always existed and it will continue to exist. The form may change but it will always be around.

My 2 cents.

I used to do Asia-Pacific PE (kind of like FoF). Now I do something else but happy to try and answer questions on that stuff.
 
Best Response

Outside of getting caught for fraud/other highly illegal stuff, PE firms don't usually "collapse" in the way that HF's can blow up because even if a bunch of investments go to zero, there's still other portcos that need to be managed. So a failing PE fund wouldn't really collapse, it would just turn into a zombie fund - they have a portfolio of highly illiquid investments, and regardless of how poor or mediocre returns have been (and regardless of whether they can/cannot raise a new fund), someone needs to manage those assets through exits (and you're getting paid to do so, plus even if you are far below your hurdle to make carry, sometimes you can restructure the fund and reset the hurdle).

If you're asking the more general question of what makes some funds successful and others not so much, I don't know the full answer but I'm sure some factors include intelligence, effort, team cohesion, and a significant amount of luck as well.

 

European market is still pretty slow, banks just arent willing to lend and a lot of Funds are sitting on assets bought at the height of the market in 2007 which they will struggle to refinance and get back to even 1.0x...fundraising is struggling as well, seeing a lot of funds at the moment having final closes at c$150m rather than the targeted $500m.

All the money is going to EM and I imagine, so will all the best analysts

 

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