Private Equity: In Essence, Plunder? | CFA Institute Enterprising Investor
https://blogs.cfainstitute.org/investor/2024/08/02/private-equity-in-essence-plunder/

CFA Institute Enterprising Investor

Private Equity: In Essence, Plunder?

To understand what private equity is at its worst is a call to action, personally and professionally.

A recent Financial Times opinion piece highlights the dangers of private equity's illiquidity. Nathanaël Benjamin from the Bank of England warns it's a systemic risk, while Markov Processes International and Equable Institute point to threats to university endowments and pension funding.

Private equity is unique as it pays high prices for public companies, converting them to illiquid assets, betting on improved management and leverage to recover losses. Current concerns include increased interest rates and a stagnant deal market, reducing earnings and making new deals unattractive. Firms hold unprecedented cash levels but are not returning expected cash to investors, raising liquidity issues.

Investors face high future commitments with reduced cash flows, risking either underallocation to equities or being called upon during low valuations. Possible solutions include lowering interest rates, declining equity valuation ratios, and more efficient secondary markets. Optimists trust in a potential Federal Reserve rate cut and a soft-landing scenario for the economy.

However, critics warn of a dire scenario where falling earnings and high debt levels could lead to bankruptcies and significant losses. Despite its risks, private equity's diverse and flexible nature makes it an unlikely trigger for the next financial crisis, but it remains a significant potential domino.

When will private equity get out of its fundraising rut?

1. Private equity fundraising fell 11.5% year over year by aggregate value in 2023, the lowest total since 2017[1].

2. Turbulent market conditions are driving down private equity returns and hampering fundraising efforts, particularly affecting smaller/mid-market firms[2].

3. To counter the exit deadlock, GPs spent much of the last two years strategizing over bespoke solutions to bring cash back to investors, leading to a surge in secondaries transactions and innovative financing tools[2].

4. Fund sizes tend to be stagnant, with many GPs recalibrating their target fund sizes downwards. Preqin expects 2021 fundraising levels to only return by 2028[2].

5. Flexibility for rolling closes has become key, as GPs are no longer systematically able to hold significant first closes. Fundraising periods are now marked by smaller but numerous closings[2].

6. The shift from the institutional investor base towards high-net-worth individuals and semi-retail investors will likely accelerate in 2024, with a flurry of feeder vehicles and/or access funds expected[2].

7. Advisors guiding institutional investors anticipate that the ongoing difficult period for private equity fundraising, the most severe since the 2007-09 financial crisis, will persist[4].

8. Investors are constrained in their ability to allocate additional funds to this asset class, contributing to the ongoing fundraising challenges faced by private equity firms[4].

9. The lower rate of distributions from private equity funds is having a knock-on effect, leading some allocators to pause on new investments into illiquid funds and reduce new investments in more liquid hedge funds[5].

10. Buyout-backed exits plummeted to $345bn last year, marking their lowest level in a decade, resulting in the private equity industry holding a record backlog of 28,000 companies valued at over $3tn[5].

Citations:
[1] Private equity fundraising plunges to 6-year low in 2023 - S&P Global https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/private-equity-fundraising-plunges-to-6-year-low-in-2023-79994493
[2] Sluggish exit and fundraising environment – how to bounce back ... https://www.loyensloeff.com/insights/news--events/news/sluggish-exit-and-fundraising-environment--how-to-bounce-back-a-year-in-review-and-a-look-ahead/
[3] PE fundraising slips for second year in a row amid tougher deal environment https://www.privateequityinternational.com/pe-fundraising-slips-for-second-year-in-a-row-amid-tougher-deal-environment/
[4] Private Equity Faces Gloomy Fundraising Forecast for 2024 - WSJ https://www.wsj.com/articles/private-equity-faces-gloomy-fundraising-forecast-for-2024-5951e96b
[5] Private equity's cash flow woes create fundraising challenges for hedge ... https://www.hedgeweek.com/private-equitys-cash-flow-woes-create-fundraising-challenges-for-hedge-funds/

S&P Global

Private equity fundraising plunges to 6-year low in 2023

In a dismal year for fundraising, CVC Capital Partners raised the largest buyout fund ever, pulling in $28.73 billion in about seven months.

Private Equity and Net Asset Value Debt – Ripping-Up the Rules of Private Equity
https://corpgov.law.harvard.edu/2024/07/15/private-equity-and-net-asset-value-loans-ticking-time-bomb-or-ticking-all-the-right-boxes/

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https://files.pitchbook.com/website/files/pdf/Q2_2024_PitchBook_Analyst_Note_Private_Capitals_Path_to_20_Trillion.pdf