PE not what it used to be
Anyone else concerned about the impending consolidation in PE? The number of PE firms is at an all time high due to a decade of low interest rates making money basically free. With higher for longer being the new norm, the number of firms will likely shrink significantly and leave a fraction of what exists now keeping all the bananas. Great if you’re at a sizable or respected firm today but making it really difficult for the small guys
Concerned? Unless the industry changes their business model, they don’t seem concerned themselves. The industry is too far gone to adopt the circular economy model.
Anecdotally I’ve seen a lot of firms genuinely concerned about the next few years given lackluster fundraises in 2023 and strained LP relationships driven by a decline in valuations and paused exits.
But what do I know, haven’t been in PE long enough to see many off periods
PE firms are both buyers and sellers, with the buying occurring about 5 years ahead of the selling. In an environment where prices are going up, PE firms win. In an environment where prices are going down, PE firms lose. From 2010 - 2022 we were in an environment where prices were going up. We’ll see what the future holds now.
I’ve often heard people say more PE firms competing for investments = higher prices, which is true, but this isn’t a problem per the above. The problem comes when the economy stalls and companies do not grow or there is less competition for assets driving price down.
In terms of consolidation — yes. In an uncertain environment like the current one where there are PE firms failing to successfully fundraise and subsequently cutting heads, it is more important than ever to end up at a “good” shop. Unfortunately that is very hard to predict and it isn’t always the case that well-known brands perform better. We had a lot of MM PE shops with good reputations go bust in 2009 / 2010.
Could someone opine on what makes a “good shop” outside of the MFs or top UMMs? Ideally reasons not related to returns since a lot of active funds are not realized yet as the reply states.
my gut is: 1) industry specialization, 2) good culture, 3) more than X vintages? How many would be “good”?
More of general than tactical advice but hopefully helpful. Something I’ve come to realize is that MM private equity firms rarely invest in themselves. They can be really good at managing their portfolio companies but can suck at doing the same for their own. Helps explain why private equity as a broader industry is highly fragmented, relatively slow to change, and inefficient compared to other equity-based investment industries.
That being said, think looking at firms that invest heavily in themselves is the best way to go. Difficult to see from outside, but maybe look to awards (know Blue Wave has a PE innovation award that is pretty well-regarded), more-heavily concentrated portfolios, technological capabilities, and quite honestly lower salaries (may indicate firm is investing heavily in itself versus compensating its employees handsomely; take with grain of salt could also mean they’re failing). Trick in PE is to get in somewhere good and grind for 20 years to the top. Makes it significantly easier when you find a place that is also growing alongside that.
Curious of how people think this compares to Hedge funds.
My sense from speaking with people across PE/HF is that the multimanager pod model has kind of "solved" public markets investing for LPs. Obviously the model is not that old, but it has gone through a lot of business cycles (2008, the bull market, 2020/COVID, inflation) and come out with steady gains.
Now, if MM AUM 10x (similar to what happened to PE in the last 2 decades), we'll see how well the system holds up.
bump
There are certain niches/sectors worth pursuing in PE, but for the most part it's just not worth it anymore
The most recent episode of the Dry Powder podcast touched on this, and the message I took was that consolidation has been happening for a while, it just isn't "in your face". 25% of Private Equity firms haven't raised a fund since 2015, so there's already been quite a few deaths, they're just very slow gradual deaths as apposed to the spectacular blow-ups we see in hedge funds.
Just listened to this. Super interesting and resonate with the idea that growth should be looked at in nominal terms. Should at least be in line with the broader market.
i suggest you read Howard Marks “Easy Money,” the time for these wave riding funds is over. now the real winners will show
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