Private equity firms face worst year for exiting investments in a decade
Category : research
Published Date : 10/18/2024
Key takeaway:
"Faced with much tougher hurdles in selling portfolio companies at prices they want, private equity firms are resorting to unconventional tactics to realise proceeds for their own investors."
A few additional thoughts:
1) Are the lack of exits a question of liquidity or rather a lack of willingness to accept reality? Are the lack of exits a function of delusional internal marks which are higher than market clearing levels and are investors (pensions, etc.) being reported returns based on off-market valuations?
Below quote validates my concern that the marks and desired exit prices are delusional rather than merely a reflection of an illiquid market:
"One industry executive said that buyout firms were still seeking “2021 prices” for portfolio companies"
2) The use of additional debt (such as margin loans and net asset value financing) to maintain payouts feels awfully Ponzi-like (in form if not in substance) to me.
Limited Partners are taking action to prevent abuse. Key quote below:
"The willingness to take on more debt has drawn scrutiny from the Institutional Limited Partners Association, an industry body representing private equity investors."
3) The use of new funds to buy assets from old funds (so called continuation funds) should warrant greater scrutiny to ensure that the new fund is paying an arms-length (i.e. market) price. Otherwise the investor in new funds are locking in negative returns (based on true market clearing prices) on day 1. The very idea of continuation funds suggests that the price paid by the new fund is, in fact, higher than the PE firm could get in an arm's length transaction.
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