On the golden sands of the Cote d’Azur, just along the beach on a volleyball night, private equity executives huddled in a large dark-suit tent and celebrated as they tried their best to ignore the crisis affecting their industry.
This week, gathered at a trade show in one of Europe’s most exclusive destinations, the major dealmakers showed their confidence even as the conditions that fueled the 10-year boom in private equity went in the opposite direction.
For many years, everything went well enough for billionaires in the mass purchasing industry. Now, as interest rates rise and their model faces the biggest test since at least the 2008 crash, private equity is watching what dealmakers hope will be their next revolution – an unprecedented wave of money from investors. retail.
“When the markets stabilize, it will be a huge time for private equity” and the inflow of retail money is a “matter of time”, not a possibility, said Verdon Perry, global head of Blackstone Strategic Partners, on stage. main of the show this week.
Acquisition groups have spent the past few years closing a record number of deals, often at jaw-dropping valuations, using an ever-increasing amount of debt. They now own a company whose financing costs are as high as its revenues are falling.
Investors who specialize in distressed debt can hardly contain their joy that these companies can get in trouble.
“For the first time since the global financial crisis and for entirely different reasons, we’re starting to see real cracks across the board,” Oak Tree general manager Matt Wilson said during a panel discussion at the show.
“The combination of lower revenue, lower cash flow and higher financial burdens will be a very difficult situation. We are very excited about what we see now before us (…) It’s hard to see a smooth landing path,” he added. .
While some argue that the top of the market has been reached, others have worried about industry practices.
Mikkel Svenstrup, chief investment officer of ATP, Denmark’s largest pension fund, used his podium at the fair to compare private equity to a pyramid scheme.
He complained about the industry’s use of “continuous money,” a rapidly growing model in which a private equity group sells a company to itself by moving it between two of its private funds. He said he was “watching carefully” “all those tricks they are doing to somehow ruin” the winning numbers.
But speaking privately on the sidelines of the show, a senior executive from a European acquisition group said he was confident that “the golden age of private equity has just begun.”
One reason for optimism is people’s pursuit of money – unlike pension funds, endowments and sovereign wealth funds that have so far driven the growth of the industry – what leading figures describe as the “democratization” of private equity. .
Part of the money will come from the rich. Morgan Stanley and Oliver Wyman said in a report last year that people with worth between $ 1 million and $ 50 million to invest will allocate another $ 1.5 trillion to private markets by 2025.
But the industry also caters to people who are much further down the income ladder.
“We are talking about a real democratization,” said Virginie Morgon, managing director of the Eurazio Group acquisition, during the fair. The sector will raise funds from “individuals not, for example, high net worth individuals” who can invest a million euros or more, but people who have five thousand or ten thousand euros, “she said.
Ariane de Rothschild, head of the Franco-Suisse private bank, and Edmond de Rothschild, asset manager, warned of the need for “a solid governance framework to avoid misunderstandings and potential reputational damage” when ordinary investors are involved.
There has also been talk of retail investors buying durable money products, which are so specialized that many people in the financial field are unfamiliar with the way they work.
“I find this product almost logical for retail investors in more ways than one,” instead of buying private equity funds, he said.
Gabriel Mullerberg is a general manager of Goldman Sachs who also specializes in business. Then he added, investment vehicles are less volatile and more diversified.
Between parties and committees, executives have warned that the sector is stalled because private valuations – of companies owned by acquisition groups and unlisted private equity firms – have not aligned with public markets.
“It’s been a tough year for many stock market investors, it’s interesting, isn’t it, because private markets still hold their valuations (…) eventually converge. Whether it’s up or down, we’ll see. with time.” ATP’s Sevenstrup said.
During the conference, the Petershill Partners Group, listed on the London Stock Exchange, which acquired it and owns minority stakes in private equity firms Goldman Sachs, recorded an accounting loss as it devalued the value of its investments.
The move highlighted how higher interest rates made acquisition companies, which receive a steady stream of money from management fees they charge to investors, less valuable. Shares of Blackstone, Apollo Global Management, KKR, The Carlyle Group, EQT and BridgePoint this year fell more than the S&P 500. It wasn’t necessarily followed by ratings from private acquisition groups.
Tiffany Johnston, chief executive officer of Blue All, which buys minority stakes in private equity firms, said: “One thing we have often been asked about lately is that our valuation or approach has changed with what is happening in public markets. . really changed (…) We found that we are only able to be very consistent. “
As insiders question the industry model, amid hopes of attracting retail investors, private equity firms are defending themselves.
George Osborne, a former British Chancellor who was at the conference as a partner in his brother’s venture capital firm 9 Yards Capital, said the sector needs to invest “long term”, looking at the energy crisis, inflation and the “problem” of the Ukrainian crisis. tragic. “
Orlando Bravo, founding partner of the Toma Bravo acquisition group, which has invested tens of billions of dollars in software deals at the top of the market in recent years, was among the most optimistic of the event.
“How the industry makes money is not dependent on market timing,” he said, adding that private equity firms have made successful deals with high valuations and failed deals cheaply. “A big company buys when it can (…) our industry isn’t about high buying and high selling, it wasn’t that before.”
But the numbers from Bain & Company tell another story. A report from the consulting firm this year stated that so-called “multiple downsizing,” or selling a company for a multiple of its earnings than it was bought for, was “the biggest driver of overall purchase returns over the past ten years “.
Bravo, however, dismissed Sevenstrap’s comparison of private equity and a pyramid scheme, saying, “Oh my God, on the contrary. It’s the best way to own in the world!”
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Private equity firms are seeing a wave of investments on the shores of the Cote d’Azur
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