- Private Equity firms are facing their lowest investment-exit totals in more than a decade, generating just $584 billion through the first nine months of 2023.
- The culprits are historically high interest rates and a pullback in equities amid an increasingly risk-averse atmosphere.
- PE firms have increased their use of margin loans and net asset value financing using shares in their listed companies to fund investor distributions, but this has prompted an industry investor group to call for greater transparency and justification of the use of loans.
- Swedish PE firm EQT Group is considering private stock sales of its portfolio companies in exclusive transactions among its limited partners.
- Some buyout firms are being forced to invest more cash to keep portfolio companies from going under, as credit companies that provide debt for most PE deals are asking for more equity investments to offset higher borrowing costs.
Private Equity has historically been an attractive form of investing for investors and firms alike, typically offering investors a plan that involves purchasing controlling stakes of struggling companies, restructuring them to increase profits, then selling them at a profit. Unfortunately, current market conditions make PE firms struggling to find profitable exits; according to Financial Times figures they only managed $584 billion worth of exit totals through nine months in 2023 – the lowest since over ten years – due to high interest rates and an increasingly risk-averse environment.
PE firms are taking measures to meet these challenges by increasing their use of margin loans and net asset value financing using shares in their listed companies to fund investor distributions. But this increased debt load has raised concerns, leading an industry investor group to draft recommendations calling on PE firms to justify and disclose loan costs; additionally due to dysfunction in IPO markets some firms such as Swedish PE firm EQT Group may consider selling portfolio companies through exclusive transactions among limited partners.
Failure to generate profitable exits also has other repercussions, according to The Wall Street Journal. Accordingly, some buyout firms are being forced to invest more cash to keep their portfolio companies afloat; credit companies that provide debt for most PE deals have demanded more equity investments as repayment of borrowing costs increases due to high-interest rate environments; which means less profit when selling off companies later, prompting PE firms to hold onto them longer than desired.
Private equity firms are currently experiencing difficulty in finding profitable exits due to rising interest rates and an overall lack of risk appetite, necessitating alternative financing methods and considering private stock sales as solutions. But without adequate exits, firms must spend more cash supporting struggling portfolio companies while being encouraged by regulators and industry associations to provide transparency around debt strategies and justification for those that use debt as capital sources. Though times may be challenging for private equity, with strategic adaptations firms can still find success within an ever-evolving landscape.
Hot Take Private equity firms are currently facing the double whammy of high interest rates and risk aversion, making profitable exits increasingly challenging to achieve. But this could also present firms with an opportunity to reassess their strategies and explore alternate financing methods which might offer long-term advantages. Transparency and justification will be key in maintaining investor trust through these turbulent times.