Is PE Fu.cked?

Is PE fucked?

Clearly it's been a private + public market bubble the last ~5 years, and now the chickens are coming home to roost.

More tenable in the public markets (where you're marked to market) than private.

Lots of equity has flown into shit-tier businesses for years at double-digit+ EBITDA multiples, just because (gotta win the bid bruh).

Floating rate debt max pain in a negative growth topline environment is no bueno.

Multiples will be depressed for the foreseeable future. EBITDA will be slashed. Exit liquidity about to be as dry as the Sahara. 

An entire generation of PE bros with phantom paper carry since ~2017 are about to be taken out back. 

What's the end game? 

Comments (32)

Nov 24, 2022 - 12:44pm
IncomingIBDreject, what's your opinion? Comment below:

This. Where does he think those "synergies" are coming from?

Array

Nov 24, 2022 - 7:44pm
IncomingIBDreject, what's your opinion? Comment below:

If history repeats itself the ones who caused the suffering will unfortunately not be the ones who suffer. 

Array

  • Intern in IB - Gen
Nov 26, 2022 - 8:04pm

I see what you're getting at but look at it this way - at an 8% hurdle rate with 20% performance fees, the sponsor would keep ~18% of those returns (yes they get paid mgmt fees, whatever) so the remaining money is going to the investor (a large portion of which is money being managed for retired people, teachers, police, firemen, etc) so is PE really the bad guy?

Nov 22, 2022 - 7:21am
Bossdogfrog, what's your opinion? Comment below:

Ofc some are getting fucked over, it's not a government job after all. If you have been living somewhat conservatively and prudent enough and you are not a shit tier performer who made shit tier decisions, you will be fine.

Most Helpful
Nov 22, 2022 - 5:05pm
acardboardmonkey, what's your opinion? Comment below:

Everyone bought into Securities at inflated valuations over the past few years. Public equities at high multiples, private equities at high multiples, real estate at unsustainable cap rates, bonds at absurdly low rates. Yes a lot of PE will get culled from infrequent valuations, but I don't see why the strategy would die. It's not like crypto where you're trying to prove a new security exists, you're buying businesses people use every day like toll roads, clothing companies, or service providers. I'd also caveat that on the interest rate point, lots of firms got favorable debt terms with portable capital structures so it's not as bad on that front

Nov 24, 2022 - 10:00pm
Aerfally1, what's your opinion? Comment below:
acardboardmonkey

Everyone bought into Securities at inflated valuations over the past few years. Public equities at high multiples, private equities at high multiples, real estate at unsustainable cap rates, bonds at absurdly low rates. Yes a lot of PE will get culled from infrequent valuations, but I don't see why the strategy would die. It's not like crypto where you're trying to prove a new security exists, you're buying businesses people use every day like toll roads, clothing companies, or service providers. I'd also caveat that on the interest rate point, lots of firms got favorable debt terms with portable capital structures so it's not as bad on that front

What do you mean portable capital structures?

  • Associate 2 in PE - LBOs
Nov 26, 2022 - 6:07pm

Typically, debt / leverage has change of control provisions meaning a new owner would need to raise fresh debt or refinance. 

With portable debt, you can essentially inherit the 'old' debt under new ownership. 

Think of buying a house which already has a mortgage, and the mortgage has a 2020 fixed rate. Very appealing!

  • Associate 2 in PE - LBOs
Nov 22, 2022 - 5:19pm

The pain is only just beginning. New funds will attempt to come to market in the next 12-18 months, but LP fundraising is dead thanks to low distributions and the denominator effect. 

  • Analyst 2 in AM - FI
Nov 24, 2022 - 9:31am

Exactly. LPs won't just stop allocating to the asset class. They are just going to consolidate their exposure to their best partners. GPs don't forget who rode with them when the market was shitty and some of my firms best GPs are legacy commitments because we stood by them through tough times like the Great Recession. Now, we have access to top quartile PE and VC funds that are always oversubscribed and get to pick and choose their LPs due to demand.

It's harder for funds that have never returned a find yet to raise and funds new to an LP to raise (unless they are an exceptional firm the LP wouldn't typically get access to). Some firms are raising third and fourth funds without their first fund even being close to the wind down stage, each time target AUM growing substantially. That type of shit is probably tough rn but the blue chip GPs will always get an allocation.

  • Associate 1 in PE - LBOs
Nov 23, 2022 - 3:56pm

Not sure what shitty fund you're at but we are about to close a double digit billion flagship, good funds will continue to raise money and will continue to generate returns

  • Associate 3 in PE - LBOs
Nov 23, 2022 - 6:14pm

Continue to raise, sure. Generating returns is going to be different after ZIRP.

  • Analyst 2 in AM - FI
Nov 24, 2022 - 9:36am

The first part, yes, but the second part about returns we will see. Leveraged loan market is dried up. Exit environment is trash. The asset class is coming to a quick halt but the benefit of the asset class is that they can wait it out and extend their fund until the entry/exit environment is better. Not to mention that funds will be able to buy assets for cheaper than a year or two ago. The firms that bought assets at peak valuations in 2021 are gonna have a tough time though for the 2019-2021 vintage.

Nov 24, 2022 - 2:21am
YoungThuggaLaCroix, what's your opinion? Comment below:

Infra PE has been having a bit of a reckoning. I think previously a lot of things looked good when you chucked 50% gearing at 3% all-in. Now it's getting to the stage where your equity returns are barely higher than your debt returns (pre-tax). Construction costs have shot up from inflation, rates have shot up and all of that drops IRR's, but your returns above bond yields has fallen because bond yields have risen.

The only benefit is we still need a lot of infrastructure and someone has to build / own it.

Nov 24, 2022 - 7:32am
iamayieldguy, what's your opinion? Comment below:

One thing that the infra guys is doing is to increasingly buy PE assets that traditional sponsors would compete for under the guise of it being "infra-like".This in part (not wholly) mitigates what you are saying since they are able to bid for higher risk assets with a lower of CoC, and still have sufficient spread between Eq Returns and CoD

Nov 24, 2022 - 1:30pm
BooBooHoo, what's your opinion? Comment below:

Yup, see a lot in European healthcare. But, sometimes they underestimate the operational risk and it blows up, which isn't great for them

Nov 24, 2022 - 3:59am
Tracer85, what's your opinion? Comment below:

Fund I'm at is planning to sit tight (more or less) in 2023 and looking at 2024 pipeline. Not sure how this will happen or a good idea but let's see

Array

  • 1
Nov 24, 2022 - 1:20pm
[email protected], what's your opinion? Comment below:

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  • Associate 1 in PE - Growth
Nov 26, 2022 - 1:24pm

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