Buyout Bubble Popping
Anyone get the sense that the buyout bubble is in the process of actively popping?
A lot of people point to interest rates - I think interest rates are a problem, but I think the industry has a way more fundamental problem - secular decline (or at least normalization) in LP demand.
~40-50% of LPs are pension funds. Pension funds have had more money going out than coming in from PE funds in the last 4 out of 5 years because many, many funds are finding that while it is easy to buy a company, exiting one at a profit is really hard. Pension funds have seen net capital outflows for 4 out of the last 5-years because so little distributions are coming out.
Buyout funds raised $1 for every $2.4 targeted to be raised by LPs. I think we're going to see two things happen quickly - (i) fee compression / more favorable LP terms, (2) lots of mid-level layoffs, (3) stealth zombie funds), (4) consolidating into some of the largest GPs which basically will turn the job into banking 2.0.
Feel free to disagree / discuss
Sources / articles:
https://www.bloomberg.com/news/articles/2024-07-1…
https://www.ft.com/content/b5ab26ad-fe3e-483d-89b7-03edb06662fe
Agreed. PE is going to get consolidated similar to HFs, but slower given MTM performance and illiquidity.
The golden age is over
Everyone was on here saying the same shit about IB 1/2 years ago…. and they’re back at record fees already. I know that as financial professionals we like to prognosticate ab topics that we don’t actually understand, but interesting to see people in PE not comprehend their own industry.
Fundraising activity continues to get back on track, 2024 will blow 2023 out of the water. Interest rates will decrease, which will lead to more deployment of capital in Q4/2025. And I will bookmark this thread for later.
what about emerging markets an argument can be made that returns lay on the other side of the fence i don´t know how much can you optimize/ unlock value in a German company vs an indian/ turkish etc. Sure there might be higher risks but could that be the actual value that pe should offer cause as far as the recent years highlighted all things considered the S&P win by KO
One of the reasons PE works in the US is that there is a deep institutional leverage market that is willing to provide debt relatively cheaply - Europe is more established, but it quickly becomes wild wild west in non European / US markets
What do you consolidated? HFs are much more fragmented. You don't have many $3-4bn HFs out there but ten times as many $30-40mm hedge funds.
Bump - how is the HF space consolidated?
Large pod shops (citadel/mlp/p72) have gained a ton of market share especially in equity l/s and macro. As noted, there really aren’t a lot of $2-4bn finds any more. $30-40m isn’t a hedge fund, that is a P.A.
Yes, I can’t imagine this view isn’t consensus at this point. It’s very obvious this is inevitable, not sure how anyone can argue otherwise.
the larger will get larger. Returns will get compressed. Fees get compressed. Economic opportunity gets compressed. Barbell approach between large and small end of spectrum. Has happened to every single asset class. PE is no different, just a matter of time
Based on this, would your advice to me (analyst, M&A) be to avoid PE and perhaps look into PC instead?
Why the MS?
The PC boat ended a while ago
PC has equally peaked
everyone’s going to get compressed! sounds the alarms! no one’s going to get any more fees! Meanwhile, your fund probably still gets 2/20 only to get bodied by the S&P 500.
“BuT tHaT’s NoT oUr VaLuE pRoP”. Correct – you have no value prop.
Most of sponsor processes im in involved the assets are doing terrible with a ton of headwinds.
this is largely due to the fact that no competent sponsor is bringing an A+ asset to market in this environment unless there are fund timing dynamics. Industry is cyclical like many others. This isn’t news
That’s not true at all. We’ve seen a ton of A+ assets that go for crazy multiples. People holding on to problem child portcos
This is incorrect and in fact the opposite is true: sponsors are only bringing out A+ assets as aren’t able to sell all the other trash they bought in 2021 / 2020 and there’s a desperate need to show distributions
“It’s going to be a terrible recession,” they cried. The recession never came. If everyone is saying something, try to think independently. Yes, I am in college. No, I am not interested in private equity. If I ask anyone in my student investment team, they’re gonna say the same thing, fees will come down, returns will be compressed, yatta, yatta. Zoom out. I’ve listened to so many podcast episodes where they thought PE was dead after GFC. Instead, we all know what happened.
Will PE look like it does now in 15 years? Prolly not. Are things not different now than 15 years ago?
Yours truly, a dumb intern.
Most insightful intern comment
An intern making a reasonable insight? What is this blasphemy?
The amount of buyout funds has probably more than quadrupled since the GFC. The amount of decent LBO targets has not. We are not seeing sub 1% rates for a decade-straight anytime soon. Instead of being contrarian just for the sake of being contrarian, just do the math
I am never gonna believe that there will be another recession on the horizon anymore. Fucking believed the non-stop rhetoric about a full-blown recession and sold out of tech stocks back in late 2022. Messed up my entire portfolio and probably will not retire until 2030.
The truth of the matter is that nobody knows for sure what the future of buyout is. However, there are strong reasons to believe OP is correct:
1) Interest rates. Unlikely to go back down to 0 which was a gigantic (and I mean gigantic) tailwind for PE the last 30 years. If you decompose returns it was pretty much all driven by multiple expansion during this period which is unlikely to be the case going forward. We’re in a fundamentally different world.
2) Capital overallocation: Apollo went from $40B to $650B aum since 2008. Marc Rowan two weeks ago literally said it himself “we were lucky to be in a time when rates were coming down and investors were hunting for yield.” That penetration growth tailwind has capped out. PE, and in particular corporate PE, isn’t a growth area anymore. When Blackrock bought GIP this year, Larry Fink literally said “PE isn’t a growing area, we see infrastructure as the future.” Now, these guys can be wrong and have been in the past but their opinions do hold weight, especially when it goes against their own self interest.
3) Processes now are insanely competitive for the best assets. ESG type stuff going for 20x+ and LPs are getting more and more concessions in order to commit to a fund. Recently we had a $500M cheque which was syndicated to $250M due to LP fee-free coinvest. The blended fees are coming down and LPs are pushing hard.
4) tax regime and scrutiny - just look at all the scrutiny on PE in the real world. Over a 20 year career you can bet that carried interest tax is going up not down
question about interest rates. Everyone wants to like about the last few years and Zero interest rates during Covid, but the early 2000s had pretty “normal” interest rates. Some of those vintage years are great if looking at PE returns.
Dude that was 15+ years ago when the industry was much younger
multiples were way way lower then
way less dollars chasing way more deals
The valuation gap between private and public was huge back then
The same thing occurred in public markets with the value factor, which hasn't performed well in quite some time
That Apollo 15x AUM growth is primarily from credit/insurance, so a little disengenuous of a stat. PE prob went from $35bn to $120bn, so sure still increased 4x, but increased by 80bn, not 600bn as your bogus stat implied.
Yes. So many funds overpaid for assets over the last few years. Can't sell assets for what they want.
As discussed, sure, higher interest rates have had a material impact, but the reality is, this was the catalyst for making the music stop - everyone knows the old game of multiple expansion is largely over for your everyday i.e., not highly sought after assets.
This doesn't mean its over for PE, but the glory days for a majority of funds most likely is.
Sitting on the LP side of things:
There was way too much dry powder raised in the lead-up to this point, a lot of it concentrated in smaller and newer funds with limited track records. What is raised must be deployed, and so you end up with sub-par assets at questionable valuations.
Across the industry you can already see the early stages of the flight to quality play out. Most of our portfolio this past year has been slow to monetize (excluding things like dividend recaps which are mostly a "pray things are better later" sort of deal), but there are a couple of notable exits that have materialized and pretty strongly too. Look at the Leonard Green asset being acquired by Home Depot for example.
If you think it's a tough fundraising environment right now, check back in a couple of years when a lot of these funds are going to have to defend their portfolios made at the peak that still haven't developed.
My own thesis as an LP, which I think is a common view, is that if you've been counting on private markets beta to do the heavy return lifting, you're going to be disappointed, but if you have a more concentrated portfolio of top tier managers your returns should still stack up.
From the LP side, what are your thoughts on the larger tech/ software players moving forward? (TB, Vista, SLP)
Bump
Very curious to hear what you’re seeing on real estate side, if you’re privvy to it.
So, assume I'm at what would be considered a "top tier" manager from a historical returns perspective and in this difficult environment we raised north of $3B. We don't pay nose bleed multiples for software and have been told there is opportunity for me as the firm continues to scale. Not a slow growth MF and not at an unestablished LMM firm rolling up sub $5M EBITDA landscaping businesses.
Do I just go to a pod shop now so I'm not poor in 10-15 years and can buy that lake / beach house or is there hope for me after all? I don't need to be a billionaire, not even close.
Does your firm actually have a real strategy beside bidding CIMs? Do they actually have deep operational expertise and are willing to do some serious heavy lifting (e.g., KPS having the conviction to buy a negative EBITDA business to selling it for a couple of billions to the Koreans)? In other words - is there any real reason why your fund can create value in a portco?
Was the fund up or down relative to the prior fund? If it was a 50% down fund - that's a big problem. It means momentum is swinging away, and generally hard to turn that ship around.
Hey, you really hit the nail on the head here. I’m just a budding investor.. Wanna bounce one thing off of you seeing your title… notwithstanding scale is surely important and whatnot, I feel queasy about these massive funds being raised, as in I don’t think you can generate top IRRs with a 20bn fundraising round. Only so much “edge” to go around. What do you think?
As a result I wish to build myself in a smaller space, where you grow the topline and sell for like 5x moic somewhat more consistently.
Idk am I thinking wrong? If not, where’s the best PE “talent” today?
I think Secondaries is going to crush it
Secondaries buy and sell LP stakes in PE funds. How can PE as an asset class shrink while Secondaries “crushes” it for an extended period of time? Yes, in the short term maybe, but long term Secondaries, Co-invest, and even private credit (as most activity there is on sponsor backed companies) ultimately are tied to the PE asset class.
Something like 1% of private assets turnover in the secondary market. If that goes to 2% as private markets reset, it’s strong growth for that segment. Like everything else, nothing lasts forever and secondaries will be competed out
Those are LP-leds, I’m guessing he was talking about GP-led continuation funds. Gets liquidity back to the LPs when they need it and gp-led fundraising has been popping off the last few years
Congrats on exposing yourself as a dumbass know it all intern. LP-led isn't the only type of deal type in Secondaries.
Pension funds are constantly getting new cash inflows to deploy, no?
They need to be constantly paying out too (retirees) - something like 45 out of 50 US states have underfunded pensions. A lot of pensions have experienced negative cash flow (calls > distributions) in their PE portfolio the last 12-24 months. Until that turns positive again, the entire fundraising environment is going to be crimped.
The further issue is that this negative cash flow for these pensions is putting a lot of heat on the investment officers - who are likely to reduce commitments to PE going forward in the near/medium term at least.
If one GP has low returns, they have a problem. If all GPs have low returns, the pension funds have a problem. Pension funds are going to be significantly underfunded relative to their growing liabilities for the foreseeable future in part due to over allocating to VC/PE in the bubble and not getting the expected returns, which will drive their need for higher returns, which will drive their future allocations to VC/PE. It’s just a cycle.
Unrelated – is a radically ageing population (at an extreme rate of fertility rate plummet) hypothetically a big problem for pension funds that would then have reduced subscribers but multiple times greater retirees?
Average life expectancy has stagnated for the last two decades and went down post-COVID. Pensions cant use this excuse anymore especially in the US.
As a college student should i not try to break into PE anymore?
The million dollar question
lol PE is gonna be a forever and lucrative industry, just that returns will come way down so the stress might not justify the high pay
There are real headwinds in PE that have been noted here, but the “industry is dying” commentary is ridiculous.
As others have said, PE is cyclical. People thought PE was in trouble in the 90s, people thought PE was in trouble post-08, and here we are today bigger than ever. Not every firm is going to grow forever and make it, but to imply that the industry faces systemic risk is just silly.
Even if pensions move away from PE or shrink (which they very well might) there’s also huge new inflows from foreign wealth funds (which aren’t going anywhere) and wealth management (ie “normal” rich people vs only the super rich) driving a lot of the growth, that trend will only continue. No one should have the majority of their portfolio be in PE, but at the same time it makes sense as a smaller allocation for anyone from high net worth individual to a larger pension and that isn’t going away.
Maybe fees come down modestly but once again, they aren’t going to 0. Carried interest taxes hit your personal paycheck but don’t make the industry structurally worse.
As others have said, people paid crazy prices for the last few years and are in trouble now. There will be funds that blow up, assets that get sold at a loss, and some ugliness but the cycle will go on and maybe the stuff that is getting bought cheaper today will be part of the next good vintage, or maybe it won’t happen for another 5 years, but it will happen eventually.
Ultimately companies can be public, they can be PE owned, they can be founder / family owned, or employee owned. Being a public company sucks for most companies below a certain size, that isn’t going to change anytime soon (I would bet regulatory landscape only gets worse for publics, not better). Families aren’t usually buying mature businesses, they’re starting new ones. And the employee ownership is nearly impossible to make sense unless someone is super generous and puts in an ESOP at some point.
My point is, being PE owned makes a ton of sense for a lot of businesses. We can talk about valuations and interest rates (which quite frankly don’t actually matter that much outside of their broader valuation impact - run an LBO and tell me how much IRR changes when you flex interest +/- 1%). If businesses are privately owned there will always be a higher bar for diligence that justifies higher fees (and again this could mean 1.5% / 15% but it won’t ever mean 0.5% / 0%).
Again, not saying there won’t be structural challenges, but the industry will be fine and plenty of money to be made. People have been calling for the death of hedge funds for 20 years and plenty of people still printing money there.
You sir are demonstrating the limitations of a forum that is almost exclusively sub-30-year-old terminally online types. Almost no one here, myself included, have ever gone through a proper market contraction. This "industry is dying" commentary is largely (although by no means exclusively) due to a lack of experience and a lack of appreciation for history.
The “industry is dying” is clearly hyperbole and I don’t think anyone would seriously say that.
but painting this as a purely “cyclical” phenomenon is wrong too.
the question is: is this now an industry which will provide anywhere close to the lucrative opportunity set that it has since 2008, given MUCH higher competition, interest rate pressures and lack of distributions? And my view is that structurally the answer is no
You're falling victim to your own complaint. You admit that you've never gone through a proper market contraction and then use that to say that anybody who thinks the "industry is dying" is just misguided. Feel free to weigh in, but don't act like you're above the rest of us trying to engage in this discussion just because you disagree with us.
I think the industry will be fine as well but the current situation might impact individual firms more, just like it in the 90s when some PE firms failed and some managed to survive and move ahead.
No one said the industry will die - however, at minimum growth will slow, and as a base case we're likely to see some declines in AUM allocated to PE. This is not cyclical - this is likely secular because the whole industry is over-allocated, and at the GP-level, the barriers to entry (i.e., starting a new fund) simply isn't there (see proliferation of GPs).
If you accept the argument that PE AUM is likely to stagnate or reverse (to an extent - capital is locked up which mitigates near-term impact), this has an outsized impact on individual careers.
PE funds more than other businesses are extremely reliant on growth in AUM to produce more jobs - as soon as funds start declining in size, firms will have 0 incentive to promote new people - and will lay off existing partners/mid-levels to right-size the carry pool for the most senior-levels. So in a flat industry -promotions/survival itself become very hard.
This is putting aside the other problem which is that as returns compress the carry is worth less and less.
And then taking a big step back - the calculus starts shifting - what is the willingness/risk tolerance to (1) grind incredible hours in an (2) industry with notably bad culture (3) while being subjected to significantly increased layoff risk at some point for (4) an amount of money that is unlikely to be materially more (particularly on average) compared to alternative career paths like investment banking and consulting (at the senior partner level) - each of which has orders of magnitudes more of senior level positions (e.g., McKinsey has ~1,000 senior partners pulling in $2-3M of cash comp+ a year vs as an example, Apollo's PE fund which as ~20 partners).