Can private equity bounce back?

Episode Summary

Executive Summary: The episode argues private equity is not broken but entering a slower, more mature phase. Higher rates, tighter credit, slow exits, and a record amount of dry powder are pressuring returns and fundraising, while dealmakers adapt with more sponsor-to-sponsor deals, continuation funds, private credit, and broader multi-asset platforms. Growth should continue, but with greater dispersion among managers and more dependence on global and wealth channels.

Main Topics: Private equity returns are slowing versus public markets (Priority: 5/5): Alex Blasstein says year-to-date PE returns are only modestly positive and likely to be subdued over the next few years because higher rates raise financing costs and vintage concentration makes recent over-deployed years harder to repeat. Record dry powder and weak deployment (Priority: 5/5): The industry is sitting on a record level of undeployed capital, creating pressure to find attractive opportunities. Deployment has slowed sharply versus the 2021-22 pace, and buyer-seller valuation gaps remain an obstacle. Fundraising is constrained by poor distributions (Priority: 5/5): Corporate private equity fundraising has weakened as institutional investors remain over-allocated and, more importantly, capital has been slow to return because realizations have been scarce. Private equity is becoming more mature and diversified (Priority: 4/5): Mike Nichols argues the asset class is not in decline but moving into a more normal, cyclical phase after years of exceptional growth. Firms are broadening into credit, infrastructure, and other alternatives to sustain growth. Exit markets are challenged, forcing creative solutions (Priority: 5/5): With IPOs still subdued and strategic/sponsor exits less reliable, sponsors are relying more on continuation funds, minority/co-control deals, structured equity, NAV financing, and secondaries to generate liquidity. Future fundraising will shift toward global and wealth channels (Priority: 4/5): GS expects future growth to come less from saturated U.S. pensions and more from Asia, the Middle East, and wealth management, including high-net-worth and semi-liquid retail-oriented products. Manager dispersion and consolidation will increase (Priority: 4/5): The speakers expect more differentiation between firms based on performance, global reach, product breadth, and ability to raise capital; acquisitions and consolidation should continue as firms build multi-asset platforms.

Key Arguments: Higher rates will compress private equity returns and make the recent 15%-20% net IRR environment difficult to reproduce. The industry deployed capital too aggressively in 2020-22, so vintage concentration will weigh on future performance. A $2.5 trillion dry powder overhang means there is capital to invest, but slow deployment and wide bid-ask spreads are restraining activity. Fundraising is weak not just because of market conditions but because LPs have not received enough distributions to rebalance or recommit. The valuation gap between buyers and sellers is narrowing as markets accept lower multiples and more realistic return expectations. Private equity is still viable, but growth will be slower and more dependent on diversified platforms and global fundraising. Private credit and infrastructure are drawing allocation away from PE because they offer attractive yields with lower risk in the current rate environment. The lack of IPOs has removed a key liquidity channel, pushing firms toward continuation funds and other creative exit structures. Longer-term success will favor large, diversified, global firms that can offer multiple solutions to LPs and access wealth channels. Consolidation through both organic build-out and M&A is likely as firms seek broader mandates and scale.

Data Points: Private equity returns year to date: ~2% to 3% - Alex Blasstein said PE returns were hovering around 2%-3% YTD, below public equities. S&P 500 year-to-date performance: almost 10% - Used as the public market comparison for strong 2024 performance. Cumulative private equity return since pre-rate hikes: about 15% over the last 2.5 years - From end-2021 through the present, PE still performed decently despite higher rates. Private equity industry AUM: about $10 trillion - Alex described the scale of the global PE industry. Historical annual PE growth rate: 15% per year - Long-run industry growth rate before the recent surge. PE growth in 2021-22: 30% - Growth accelerated unusually during the ultra-low-rate period. Global dry powder: $2.5 trillion - Record undeployed capital sitting on the sidelines. Dry powder plus leverage purchasing power: about $5 trillion - Alex estimated total purchasing power including leverage. Deployment pace in 2023: about 40% of dry powder - Deployment slowed materially versus earlier years. Average annual deployment pace: about 50% - Longer-run reference level for deployment as a share of available capital. Deployment pace in 2021-22: closer to 70% - Industry deployed capital aggressively during the low-rate boom. Corporate private equity fundraising in 2023: about $700 billion - Lowest annual fundraising level since 2017. Lowest fundraising since: 2017 - Shows the extent of the slowdown in capital raising. Dry powder purchasing power context: Record by a mile - Alex emphasized the scale is unprecedented. Private equity return target: 15% to 20% net IRR - Typical target range that will be harder to achieve in coming years. Private credit base rate: 5% to 6% - Shown as part of the competing yield opportunity versus PE. Private credit spread: 5 plus 100 basis points range - Illustrates attractive returns in private credit. Rate hikes since the recent cycle began: 11 rate hikes - Gina highlighted the financing impact on dealmaking. Secondary market size: $100 billion plus annually - Mike described the secondary/continuation market as large and growing.

Pivotal Quotes: "There's no doubt that higher interest rate environment is going to have an effect on private equity returns." — Alex Blasstein: Core thesis on why PE returns should be more subdued in the next few years. "We think private equity is not dead by any stance." — Mike Nichols: Mike frames the industry as cyclical and still positioned for future growth. "Private equity is not going anywhere." — Alex Blasstein: Used to emphasize long-term durability despite current headwinds.

Implications: PE remains investable, but returns will likely be lower and more dispersed. Winners should be large, global, multi-asset managers with access to wealth and international capital, while liquidity solutions and secondary-market innovation become increasingly important.