Mergers & Acquisitions
Private Equity: Crash Landing or Still Ascending?
By Vishesh Raisinghani
July 26, 2023
Assets under management by private firms that invest in equity, credit, real estate and other alternative assets have quintupled since 2008 to $11 trillion, according to McKinsey. However, the pace of dealmaking slowed down considerably in the second-half of 2022 and has yet to recover. What do experts make of this fork in the road?
Higher interest rates have played a part in this slow down. Higher rates create pressure on asset valuations, which has already played out in public markets, but hasn’t been fully reflected in private markets because assets are marked-to-market on a quarterly basis.
Some say the industry is getting more competitive even as these hurdles rise. “At the exact time that the game is getting tougher we’ve got more and more people trying to play it,” says Charlie Munger at the recent Berkshire Hathaway investor conference on his company’s acquisitions strategy. “There’s too much private equity, too many buyers of all kinds … it’s making it a very tough game for everybody.”
However, some players aren’t discouraged by the tougher game. Brad Bernstein, managing partner at FTV Capital, believes higher interest rates have simply adjusted investor expectations.
“In a zero-interest rate world, it made sense to invest more in your business today to maximize long-term growth. As interest rates rise, there is a need to be more disciplined to generate profits in the here-and-now,” he says. “With that, investors are going back to basics from valuing revenue multiples to focusing on the earnings multiples. When you’re in an asset bubble you see investors redefining valuation metrics, but when the bubble breaks we go back to basics, which is underwriting fundamental cash flow projections.”
Bernstein also believes lower valuations in the public market could push more entrepreneurs to private funding sources. “Right now, the IPO market is shut. The bubble of the 2020-2021 market got so overheated that a wide range of public IPO investors got burned,” he says. “It will take a long time for these scars to heal and require a meaningful period for public investors to come back to the IPO market.”
Instead, he believes private equity offers a better alternative to entrepreneurs. “The PE ecosystem has developed over time to allow for capital at every stage and more opportunities for additional rounds of capital to facilitate growth, acquisitions and recapitalizations.”
FTV Capital’s latest fund was oversubscribed at $2.3 billion in commitments in March. Overall private market fundraising was up two percent in 2022, according to McKinsey, and 41 percent of family offices surveyed by Goldman Sachs said they would raise their allocation to private equity this year.
So despite some short-term hiccups, investors remain committed to the industry.