Slowing deals push private equity unsold assets to record high

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Global private equity groups hold a record 28,000 unsold companies worth more than $3 trillion, as a sharp slowdown in trading puts pressure on investors looking to sell assets.

Figures revealed in consultancy Bain & Company's annual private equity report show how quickly the sector has grown over the past decade and the challenges it faces as interest rates rise, leading to higher financing costs.

“It may take another two to three years before the money starts to come back. [to investors]”Hugh MacArthur, chairman of Bain's private equity business, told the Financial Times. “This is probably the biggest concern in the market right now. “

Last year, the total value of companies in the industry sold privately or on the public market fell 44% through 2022 to its lowest level in a decade.

Private equity firms see even greater drops in value when they sell portfolio companies to competitors, a practice that makes the industry look like a potential “pyramid scheme,” one major investor said.

Last year, the value of companies sold to other buyout groups fell by 47%, largely due to a mismatch in perceptions of asset value.

The Bain report found that more than 40% of companies awaiting sale were at least four years old, suggesting their owners should be preparing to sell. Private equity firms typically own portfolio companies for three to five years, but in some cases it can be longer.

“Half of that $3.2 trillion should be in the sale window,” MacArthur said. “This is going to be a problem that lasts for many years.”

When assets are difficult to sell, private equity's need for liquidity (payments to investors who want to exit) is difficult to meet.

This has prompted the industry to use alternative financing strategies, including “net-of-asset” financing (loans secured by portfolio companies that are often heavily indebted) and moving companies into new in-house funds. This allows new investors to come in while others exit.

As equity loans become more common, they are especially subject to greater scrutiny from investors. The Association of Limited Partners, the industry body representing professional private equity investors, is drafting advice to get more information about the timing of its use and its risks.

The problems buyout groups are having selling assets are causing diverging fortunes as they try to raise new money from investors.

“This has truly been the year of the haves and the have-nots,” the Bain report said. Just 20 funds accounted for more than half of the $448 billion raised in private equity, with investors focusing on a track record of returning cash to backers. company of.

The “secondary” market – where private equity investors buy and sell existing shares in funds and private equity firms transfer assets from old funds to new ones – is another bright spot.

The amount of money raised in the secondary market nearly doubled last year, with firms such as Blackstone and Lexington Partners each raising more than $20 billion.

There are also signs that the traditional IPO exit route is making a comeback.

Last week, German beauty retailer Douglas, backed by private equity group CVC Capital Partners, announced plans to list in Frankfurt, seeking a valuation of about 6 billion euros.

EQT-backed dermatology company Galderma also announced its intention to raise $2.3 billion through an IPO on the SIX Swiss Exchange, valuing it at about $20 billion.

There have also been examples of asset deals among peers, including Veritas Capital's sale of a stake in software company Cotiviti to KKR in a deal that valued it at $11 billion.