A group of top financiers sat in Berlin seven months ago marvelling at how much money they had made during a global health emergency.
As they gathered again this week at the latest instalment of the private equity industry’s SuperReturn conference, the backdrop was fundamentally different.
The massive government stimulus packages and central bank crisis measures that had enabled them to keep companies afloat — and use cheap debt to strike new deals and pay themselves dividends — are a thing of the past.
“This is a time of reckoning for our industry,” said Philipp Freise, the European private equity co-head at KKR, which went on an aggressive dealmaking spree during the pandemic-era boom.
The Federal Reserve and Bank of England both raised rates while the dealmakers were gathering. Listed buyout groups’ share prices have tumbled this year. Investors are struggling to commit cash to new buyout funds after pouring money into the industry last year.
The enormous flood of deals struck at high valuations during the boom of the past two years are at risk of turning into what at least four senior dealmakers privately referred to as a “bad vintage” — the private equity industry’s wine-driven euphemism of choice, which means pension funds and other investors would make less money than they hoped when they committed cash to buyout groups’ funds.
Private equity struck deals worth more than $800bn last year, an estimate from Preqin shows.
Those that paid high multiples for fast-growing companies in that period “are going to wake up with a terrible hangover,” said Gabriel Caillaux, co-president of growth investor General Atlantic.
“In November the biggest question was, God, when does the music end — and in a way it’s healthy it has,” he said.
The music at SuperReturn had not quite ended. Private equity executives attending the conference were treated to an intimate Duran Duran concert in a former malt factory, followed by a DJ set from Mark Ronson, with free drinks flowing.
On the same evening, the investment bank Evercore hosted an Ibiza-themed dinner and cocktails evening at Soho House with a “summer white” dress code and a performance from Groove Armada.
Ares Management put on a more low-key event at which former racing driver David Coulthard, who won 13 of his 247 Formula One races, spoke about winning.
Four main determinants of how much money the industry makes — companies’ earnings growth, rising multiples, and the amount and cost of debt — are “fundamentally challenged”, said Ares’ chief executive Mike Arougheti from the conference’s main stage.
Still, he was optimistic. Private credit was in a stronger position, he said, and the fall in private companies’ valuations “won’t be nearly as severe as what we’re seeing in public markets.” Private market valuations are set by a process of sophisticated guesswork based only partly on the value of comparable listed businesses.
“For those that have liquidity and [can support the companies they own], this will present more opportunity than risk,” he said.
Others also made positive noises, perhaps not least because the conference is largely an opportunity to raise money from the pension funds and other investors who are given free passes for a conference that costs private equity executives more than £4,000 to attend.
“In the good times, how do you argue that you have a return advantage over the public markets? It’s difficult,” Freise said. “Now, if we do our job in a time of crisis . . . we ought to be able” to beat the markets.
Questions of economic inequality and the real-world impact of a cost of living crisis received a brief mention. “The teachers, the labourers, of course with the food and energy prices we have, they are suffering,” said Jan Ståhlberg, founder of Trill Impact.
“None of us here is really suffering, I mean let’s face it. All of our companies are doing well, we’re getting debt,” he added.
Dealmakers and private equity investors were torn about how long a looming downturn could last. In private meetings at the InterContinental hotel, the industry’s senior figures predicted everything from an 18-month “blip” to a difficult decade.
The industry has grown so much since the last downturn that its role in the economy has fundamentally changed. Private equity alone is forecast to have more than $6tn in assets under management by the end of this year according to data provider Preqin, up from $1.7tn in 2010.
Its growing role has brought it in for greater scrutiny. Amundi Asset Management’s chief investment officer Vincent Mortier said this month that parts of the industry resemble a Ponzi scheme. And in the US, three authorities — the Securities and Exchange Commission, the Department of Justice’s antitrust unit and the Federal Trade Commission — have the industry in their sights.
That prompted one attendee, sitting down for a private meeting, to mutter sarcastically to his counterpart: “The SEC’s going to come and audit everything you say.”
What went largely unspoken, at least in public, was the enthusiasm that some cash-rich buyout groups and distressed debt investors felt about the prospect of turning any crisis to their advantage by swooping on hard-hit companies.
“I’m excited, I’m looking forward to this environment,” one dealmaker said privately. “Some of the best, most interesting deals will be done in the second half of this year.”