Private equity is having a hard time in at least two different directions right now. One is fundraising, which perhaps shouldn’t be a priority for an industry with almost US$2 billion in estimated dry powder waiting to be invested. PitchBook’s recent private market fundraising report for the first quarter warns “that 2023 is already tracking well behind last year”, which itself was a fairly poor fundraising year.
As of end March, according to the report, private equity fundraising was down 15.8% year-on-year for the trailing four quarters, with some $455 billion raised. It describes a “melancholic” mood among fund managers.
John Stake, managing director and co-head of fund investment at private markets investment manager Hamilton Lane, has been quoted as saying this will be the hardest fundraising market ever. While that is perhaps an extreme claim for an industry that’s really still only some 50 years old, it’s likely to be a lot harder than in recent memory.
One factor in a private equity firm’s ability to raise new funds is its ability to return money to investors in previous funds, who may then invest in upcoming ones, or whose results can at least be demonstrated to other potential investors. That brings us to the asset class’s other problem. As cited in a recent Financial Times report, private equity firms have been selling stakes in companies they took public at steep discounts, partly to return cash to investors. According to the report, a 180% year-on-year jump in the volume of such sales has also seen two-thirds of the follow-on deals at prices below the IPO price of the portfolio company shares.
The FT’s view is that private equity firms have given up waiting for a revival in overall stock market valuations and are exiting at whatever price they can get. It cites the example of Blackstone Group, which sold a roughly10% stake in dating app business Bumble in March at around half the original IPO valuation. Other firms cited in the report as making similar sales, though not at quite such drastic discounts, include Apollo Capital Management and General Atlantic. Yes, in at least some instances, private equity investors in some assets have only been able to realise half the value of what they paid for them.
It’s worth recalling what set those original IPO valuations in the first place. Wasn’t it private equity firms with vast volumes of dry powder, bidding up the value of assets, often in competition with each other? With the end of the cheap money era, are they ever likely to see such valuations again? Those are points worth pondering for any institutional investor considering putting money into their next funds.