Sell in May and go away - if only private equity professionals were in a position to say that they’d done that. Many are going to spend their summers worrying about the over US$3 trillion of unsold investments sitting on their balance sheets, as noted by Antoine Gara in a recent Financial Times article. And while Gara highlights the Blackstone Group’s final exit from the last of its holdings in Refinitiv, an acquisition that has earned an estimated £12 billion ($15.41 billion) since its acquisition from Thomson Reuters in 2018, he also notes that this is because it’s one of the few recent big buyout deals to exit with strong returns in a reasonable time frame.
The reasons are obvious - and worrying. “Rising interest rates in recent years have caused valuations to drop and initial public offering activity to grind to a halt”, observes Gara. As a result, both strategic and private equity buyers are less willing and able to make big acquisitions, with debt financing scarcer and pricier.
In its latest Q2 2024 US PE Breakdown, PitchBook also itemises several tactics showing “GPs chip away at PE's exit logjam”. However, not all are very persuasive. For instance, the relocation of some assets into continuation funds hardly looks like the wish to hold on to value that many GPs once touted - more like the wish to put the problem on hold.
I can remember a similar environment from Asia Pacific just over a decade ago. The first big wave of Western buyout firms had set up shop in the region for the first time and picked up some large assets. Then came the global financial crisis, and a sudden reset in valuations and funding conditions. In one of the standout examples of the consequences, CVC Capital Partners had its investment in Australian media property Nine Entertainment wiped out in October 2012, swapping over $3 billion in debt for equity to hedge fund acquirers, when market conditions turned against its expensive acquisition. CVC steered clear of new Australian deals for a long time after.
I’m sure one or two of the deals closed before the recent interest rate shock may be facing similar outcomes. The wider questions raised around the current situation, though, are the even more worrying ones. Was it all about leverage all along? Where are the much-vaunted value enhancement and business improvement smarts of buyout firms now that the chips are down? Have they actually been able to create businesses with improved, lasting value, rather than simply levering their valuations to higher multiples with cheap debt that just isn’t there anymore?
That’s a question that the industry, and its investors, still need to ponder, in my opinion. They’ve got big soft cushions of money to sit on while pondering, mind you - some $3 trillion worth. And with the current drag on exits, probably quite some time in hand.