PE losing its luster? Thoughts from current PE guys appreciated

Like old Waylon said -- things are all changing, the world's rearranging, a time that will soon be no more... The only constant is change. PE isn't going away, but like any industry, it is maturing (look at KKR and Blackstone as public companies now). Totally linked to credit availability in my opinion, but we'll see...

In short, there is a ton of money chasing too few deals, making it harder and harder to make a good return on your investments. There are also many many many little ibanks and decent brokers popping up that run good, competitive processes for smaller and smaller companies, so bids on companies on all ends of the spectrum get bumped higher and higher.

TheKing is right. There is simply way too much AUM chasing too few assets. Surprisingly, the same thing has already happened in many emerging markets.

A similar phenomenon is happening with HFs, particular equity HFs, but to a lessor degree. So many crowded fucking trades.

I think a lot of PE firms will die a slow death as they won't be able to raise a new fund. Working at a shop and winding down their existing portfolio doesn't sounds too exciting..

Everything that is excessive has to end sooner or later. At some point, the decks will have to be cleared in the Asset Management industry.

I think that all the factors mentioned above are true. There are definitely too many PE firms and it drives up valuations. Buyers lists in the MM can extend beyond 200 companies, which is absolutely ridiculous when you think about it. Any strong company is going to get pursued by a large number of PE shops.

Personally, I think a lot of PE firms will go out of business over the next 10 years. The reality is that it takes a LONG time to kill a PE firm. Investment periods last five years, and then the liquidation period can be another 5- 7. That means a PE firm that closes on a fund TODAY can survive for basically 12 years. So while the fundraising market has been tough since the recession, I suspect that we won't see the full impact of this for another 5-10 years.

The other alternative would be Limited Partners putting pressure on the economics of private equity firms. I suspect the days of 2/20 are limited as groups get desperate to raise new funds and take a hit on the economics (maybe going to 1/30, or perhaps even 1.5/20 or 1.5/15). I've already heard of some funds doing this, which is bad for the overall industry. This is probably a longer term trend, but definitely a possibility.

Additionally, I think the megafunds are going to struggle significantly. They have SO much money to put to work, but the availability of acquisition targets is limited. I would suspect that every megafund has already fully vetted a potential investment in each F1000 company (I could be very wrong here). Also, many of the megafunds club up to get deals done. What is the point of diversification across the megafunds if all of the funds are going to make the same investment? I could be way off on this point, but it is a personal belief of mine.

I think the article is way off on some of their assumptions. They call a PE firm selling a portfolio company to another PE firm as "pass-the-baby sales." This makes absolutely no sense. A company can transfer between PE firms a dozen times and still be a strong investment for each firm. As long as it continues to grow, every PE firm that touches it can make money on it. At the end, it can be IPOed, sold to a strategic buyer, or held into perpetuity and continue to cash flow for its owners. This is perfectly acceptable and a large part of industry.

Finally, the article states that the value of the portfolio companies held by all PE firms exceeds the capital to invest. This is a pointless comment. First of all,the comparison isn't even apples to apples. Sales to PE firms are not the only way to exit an investment. Second of all, PE firms use leverage as a significant (50+%) component of the acquisition price. So if the value of the companies to be sold was approximately 2x the amount of capital PE firms had to invest, this would be a much more positive ratio than if it were 1:1. Not a very well thought out statement by the article.

PE firms are just like any other corporates in terms of competitive advantage. When margins are fat, competition will most certainly come, let alone for a industry with no true niche. Coupled jaw dropping rates and huge M2, this also means insane bidding amongst a tight and predictable supply.

Effectively most PE do not truly add value and do turnarounds or make a firm more efficient etc. Though many PE firms have claimed they no longer do market cycle arbs, that is still in essence what they are doing. You can tell from why they have been willing to pay up rich valuations for a firm that does not have much to tweak.

For MM PEs, what this means is that they will be more willing to take up higher leverage, higher valuations for companies which are far more dicey than what they analyze to be solvable and hope to jump into the high end of the cycle bandwagon with the big boys, provided they can find any deals that the big boys havent taken. This indicates that they will be more jittery than normal in their sale process.

Also coupled with the fact that most LPs will want to invest fast within the vintage timeframe will also certainly mean destruction for the smaller shops and perhaps a few good spectacular blowups for the big guys if they dont tread carefully.

See the thread on portfolio operations groups in PE. Being able to make significant changes to companies post-acquisition is a driving theme these days. Can;t jurst rely on simple multiple expansion anymore. Time to roll up the sleeves