A “constipated” private equity industry must compromise on price to shift assets built up in the boom era, and some buyout houses could disappear altogether, senior executives say.
The reckoning is one of several major challenges confronting private markets as industry leaders gather at the SuperReturn conference in Berlin.
Fears about the impact of artificial intelligence on the once-hot software sector, a struggle to distribute capital, skittish retail investors and the war in Iran have all taken a toll. Meanwhile, hopes have fizzled that buyout firms could pick up the pace on company exits this year.
Victor Khosla, the founder of credit investor Strategic Value Partners, pointed to price gaps between would-be buyers and sellers. “There are entire sectors like private equity, like real estate, that are constipated. They can’t sell,” he said Wednesday, speaking on the conference’s sidelines to Bloomberg TV.
Private equity “lost its way a little bit” during a decade of near-zero interest rates, Scott Kleinman, co-president of Apollo Global Management Inc., told Bloomberg TV.
Speaking in general about the industry, he said it lost its focus on paying reasonable prices and improving businesses. Funds raised from 2017 to 2022 are particularly struggling.
“The inventory of private equity-owned companies is really, really high,” he said. Now, firms will “have to start capitulating for sure on valuations” and some managers will have to raise smaller funds or “go away,” Kleinman said.
Still, he said the industry was making progress on digesting assets — a process he has likened before to a pig moving “through the python.”
Buyout firms shouldn’t depend on the IPO market, but should focus on owning and running businesses that can generate cash and pay dividends, said Anuj Ranjan, chief executive officer of Brookfield Asset Management Ltd.’s private equity unit.
Not Equal
Executives were divided over the challenge AI poses to the software sector, previously a favorite of both private equity firms and direct lenders.
Khosla of SVP said his firm had zero exposure: “The businesses that get into trouble in software don’t just get into a little trouble, they fall off a cliff,” he said.
After private credit got a “little bit toppy,” lenders are likely to see lower recoveries and more severe losses when defaults occur, particularly for software loans made in 2020 and 2021, said Jack Neumark, co-chief executive of Fortress Investment Group.
And John Redett, co-president at Carlyle Group Inc., said limited partners want the private equity firms they invest with to move away from software and toward the real economy.
“The old world is the new world and what LPs want to talk about are industrial businesses, defense, national security, supply-chain resilience and energy,” Redett said in a panel discussion.
However, software is among the best-performing sectors at Goldman Sachs Group Inc.’s asset management arm, which has focused on large, mission-critical applications.
“Not all software is created equal,” James Reynolds, the unit’s global co-head of private credit, told Bloomberg TV. The key question is how much companies embrace and embed AI, he said.
Orlando Bravo, co-founder and managing partner at Thoma Bravo, a major backer of software-as-a-service companies, said the “SaaSpocalypse” was over. “It is finished. No more,” he told Bloomberg TV, as investors realize how adaptable SaaS companies are, and how they can offer agentic AI to corporate clients.
At the same time, AI threatens to disrupt other niches favored by private-markets investors, and raises questions about existing and future investments.
A slowdown in tech dealmaking makes sense, Bravo said. “We’re treading carefully because we want to buy companies that are part of the future, not companies that are stuck in the past.”
AI disruption is looming for professional services, including law, accounting and consulting, said Kleinman of Apollo.
Silver Lake, another big technology investor, has a 20-strong internal AI team to educate dealmakers and review portfolio companies, said Christian Lucas, a managing partner at the firm.
The unprecedented rush to fund the global AI build out could also store up future headaches.
As lenders funnel billions of dollars into projects, “a long-term market needs to evolve” for buying and selling finished data centers, said Julian Salisbury, co-chief investment officer at Sixth Street Partners. Financing also brings concentration risk, as funders compete for the same prospective borrowers, he said.
“When things grow this fast, there will inevitably be losers” along the way, Salisbury said, adding he’s expecting “some kind of shakeout” over the next two to four years.
Psychological Issue
Private credit executives, meanwhile, mounted a fresh defense of their business, saying elevated redemption requests didn’t reflect underlying problems, though some acknowledged more loans could go sour.
Salisbury of Sixth Street, whose firm manages more than $130 billion of assets, said he expects defaults in private credit to rise, given how quickly the industry ballooned to $1.8 trillion in size.
For his part, Blair Jacobson, co-president of Ares Management Corp., said retail private credit vehicles aren’t having performance issues but are up against the psychology of individual investors.
“If you look at many of these wealth vehicles, they are performing exactly as intended,” Jacobson said in a panel appearance. “For all the media discussion and anxiety around private credit, the credit statistics of our portfolios — particularly in the US — it’s improving.”
Withdrawal requests have centered on so-called business development companies that aren’t publicly traded. These BDCs make up just a fraction of the total private credit universe, which broadly defined could be a $30 trillion to $40 trillion asset class, said Reynolds of Goldman Sachs.
Written by: Dani Burger, Jan-Henrik Foerster, and Leonard Kehnscherper — With assistance from Meg Short, Silas Brown, Bella Farr, Ryan Gould, Neil Callanan, Swetha Gopinath, and Katia Porzecanski @Bloomberg
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