Writer Douglas Adams said he loved the whooshing noise deadlines made as they sailed past. Not so buyout groups.
For the first time in ages, private equity firms are having trouble finding people to hand over cash. The mighty Carlyle Group of the US has sought an extension from investors to push back a deadline to raise a flagship $22bn fund from next March to August.
Elsewhere, Apollo has lamented a so-called “denominator effect” among limited partners such as pensions and wealth funds. Falling public asset prices have left them arithmetically overexposed to private assets and loath to commit to new funds
Big private capital managers have been seeking to tap the rich, private investors more. But heavy redemptions at retail funds leader, Blackstone demonstrate the risks of that.
Stock market investors are fleeing too. The shares of Apollo, Blackstone, Carlyle and KKR are down between 20 per cent and 40 per cent in 2022, worse than the S&P 500.
Yet, even with a tough 2022, private capital managers have had a good run. Blackstone alone raised $270bn in 2021 and is soon poised to crack the assets threshold of $1tn.
Alternatives groups have outgrown their leveraged buyout units. They deploy billions in credit and real estate investing. The businesses are increasingly usurping the role of large banks.
Bosses will not fully admit it yet, but the sheer amount of capital flooding in will ultimately depress returns. The incentives created by being a publicly listed manager are clear. Mutual fund investors prefer the steady drip of annual management fees over erratic but large buckets of carried interest. Management income is valued at more than 20 times earnings.
Is private capital’s growth era ending? That will depend on whether wealthy retail investors can ultimately stomach the illiquidity of alternative assets. Each side of the equation these days is unenthusiastic about handing over cash. A cyclical setback for Carlyle may represent a secular setback for its whole industry.