Private equity firms pivot away from traditional buyouts

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Some of the world’s largest private equity firms are accelerating a pivot away from mega buyouts and into businesses such as private credit as higher interest rates force them to tear up their playbooks.

After a decade of record dealmaking, higher rates have brought buyouts to a near halt over the past year and left many private equity firms saddled with portfolio companies acquired at high prices.

The grim backdrop is hastening a push that was already under way by some of the industry’s biggest names into new businesses including lending to companies, which has become more profitable as central banks have raised interest to bring down inflation.

Top executives from Apollo and Blackstone were among those laying out the potential for the business, known as private credit, as well as infrastructure investing as thousands of dealmakers and investors gathered this week in Paris at the annual IPEM industry conference.

In a sign of how private equity is rapidly moving beyond its swashbuckling roots in buying large companies, the focus in Paris was squarely on how firms are positioning themselves as an alternative to the traditional banking system, capable of making multibillion-dollar corporate loans.

Jim Zelter, Apollo’s co-president, said that in an era of higher rates there were “unprecedented” returns available in private credit. The New York-based firm is increasingly targeting loans to large companies, according to people familiar with the matter. A recent example includes a €500mn loan to Air France.

Apollo’s private credit unit now manages more than $400bn, dwarfing the $100bn in assets under management in its buyout division, historically the cornerstone of the group’s business.  

Blackstone’s founder and chairman Steve Schwarzman also pointed to the profits to be made lending to companies.

“If you can earn 12 per cent, maybe 13 per cent on a really good day in senior secured bank debt, what else do you want to do in life?,” Schwarzman told the conference. “If you are living in a no-growth economy and somebody can give you 12, 13 per cent with almost no prospect of loss, that’s about the best thing you can do.”

This month, Blackstone merged its credit and insurance arms, which together manage $295bn, more than double the $137bn in its private equity business. Schwarzman has said the combined business could grow to manage $1tn in the next decade.

The likes of Apollo and Blackstone, as well as firms specialising in private credit, raise money from investors including pension funds and sovereign wealth funds that is then used to fund their lending to companies.

But the departure from traditional buyouts is likely to come with lower returns. In the more than decade-long period of low interest rates, the average buyout fund returned around 18 per cent, according to data from Adams Street Partners.

By comparison, private credit funds are now expected to deliver returns in the low teens, albeit with investors exposed to less risk as the loans come with security over a corporate borrower’s assets.

Despite the expansion it has already had in recent years, private credit will grow faster than private equity in coming years, according to many executives at the conference.

“Credit has probably been the fastest growing part of the alternatives market,” said José Feliciano, the co-founder of Clearlake Capital. “We think that’ll continue to be the case particularly given the interest rate environment today.”

The appeal of credit compared with private equity has been made more stark by the challenges facing the buyout industry.

“The first half of this year you’ve seen capital deployment in private equity go down 37 per cent, so the industry has chosen not to make investments,” said Edwin Conway, a senior managing director at BlackRock.

The volume of exits PE firms have made from buyout deals — typically by floating a portfolio company on a stock exchange or selling it — have slumped more than 60 per cent from their peak in 2021, he said.

“The dominance of private equity and real estate, that’s changing,” Conway added. “Other asset classes are playing a more profound role.”