Welcome to a new, humbler private-equity industry(economist.com)
economist.com
Welcome to a new, humbler private-equity industry
https://www.economist.com/finance-and-economics/2023/04/25/welcome-to-a-new-humbler-private-equity-industry
7 comments
Summary is “free money gone; now private equity has to actually invest” instead of throwing cash around, buying everything like a teenage girl in a trendy clothing shop with their parent’s credit card.
> And the new phase will favour investors willing to roll up their sleeves and improve operations at the companies they have bought
Sounds good. The investment meta-game played atop of companies that do produce societal value, I feel has been a gross waste of focus. Money going every which way but nothing materially changing. Valuations skyrocketing net wealth yet no tangible value produced.
Sounds good. The investment meta-game played atop of companies that do produce societal value, I feel has been a gross waste of focus. Money going every which way but nothing materially changing. Valuations skyrocketing net wealth yet no tangible value produced.
It does seem like things working slightly more like intended, according to the article at least. The whole cycle of PE firms coming in, gutting the companies for short term profits, claiming victory, and then auctioning off the shell is one of the many gross effects of the system we have today. I’m sure that aspect still lives on today, but to the article’s point, at least the PE firms will have to do a bit more legwork to get away with it.
Vintage 2020-2024+ are going to be some of the worst for PE, after a 40 year bull run driven by rates going from 20% in 1981 to 0% in 2021. Now there's too much capital in the hands of people who have been trained for years that to be successful, all they need to do is deploy capital, without a real understanding of the underlying business. Just ask experienced operators if their PE board members know what they're doing; I'd venture to guess the vast majority would respond negatively. It will take a few years for this excess cash to get washed out, and then you'll have a longer-term washout of all these people who have spent years refining their skills to be good at capital deployment, not to return capital in a differentiated way (per Bain stat on 5% driven by profit). For so many years, the business has basically been "show up, be a reliable soldier / good politician, know how to deploy capital, and you'll get promoted and make a bunch of money". It's hard to see how that will remain the case, particularly as the LP return expectations go up transitioning from a positive sum environment to a zero sum environment.
It feels like we're in the middle of a "back to basics" moment. Funds will need to figure out ways to develop true operating advantages, but not in just a performative way like most have done in the last 20 years. Now it will really count. There are a small set of funds who are true experts, spend management fees on teams of experts that are constantly involved to support management (not just an outsourced recruiting team, a bench of "advisors" with nice brand names, or a Bain team on retainer, but truly know how to operate all aspects of a business). And the exciting thing is that there are people who do this well, consistently. I.e., it is possible with the right team and execution. And there is a particularly interesting opportunity right now in that so many businesses are PE-owned and poorly managed, for those who know what they're doing. Lot of things that worked before in a low/zero cost of capital environment will now break and create forced sellers.
Reality here likely ends up being far more complex / unpredictable, but directionally this feels accurate.
It feels like we're in the middle of a "back to basics" moment. Funds will need to figure out ways to develop true operating advantages, but not in just a performative way like most have done in the last 20 years. Now it will really count. There are a small set of funds who are true experts, spend management fees on teams of experts that are constantly involved to support management (not just an outsourced recruiting team, a bench of "advisors" with nice brand names, or a Bain team on retainer, but truly know how to operate all aspects of a business). And the exciting thing is that there are people who do this well, consistently. I.e., it is possible with the right team and execution. And there is a particularly interesting opportunity right now in that so many businesses are PE-owned and poorly managed, for those who know what they're doing. Lot of things that worked before in a low/zero cost of capital environment will now break and create forced sellers.
Reality here likely ends up being far more complex / unpredictable, but directionally this feels accurate.
Much of this also applies to VC.
Can’t say I’ve seen any humbleness this far. Mood bounced back remarkably fast post covid & Ukraine
A bit of turbulence is helpful when trying to find good opportunities
A bit of turbulence is helpful when trying to find good opportunities