Listed Private-Equity Firms Stress Credit Role
Summary
- Buyout shops recast their role as lenders, and other takeaways from first quarter earnings discussions
Private-equity firms are rushing to adapt to an economy in which their longtime cash cow—big leveraged buyouts—has grown a little tired.
Recent first-quarter results reported by large private-equity managers showed firms trying to adjust to a new economy. Financing is tight, so big buyouts are scarce. Valuations are low, so asset sales are out.
Instead, firms are rapidly trying to expand in private-credit, an investment strategy expected to thrive as interest rates rise and traditional lenders retreat.
More below on that trend, and other takeaways from the largest firms’ first-quarter reports and investor calls.
Buyouts Are Out, Credit Is King
Fundraising has become tougher for all strategies, but most of all large buyout funds. KKR Chief Financial Officer Robert Lewin recently called traditional private equity “the most challenged part of the fundraising market."
Blackstone’s credit and insurance group raised $16.6 billion during the quarter, compared with $4.6 billion for its private-equity funds. Apollo Global Management raised a total of $31 billion in the quarter, but only about $1.4 billion for its PE strategies.
So firms are working overtime to promote their credit businesses. TPG Chief Executive Jon Winkelried called private credit a “multitrillion-dollar opportunity." Through the $2.7 billion acquisition of debt manager Angelo Gordon unveiled recently, TPG aims to grow in credit and expand beyond its private-equity wheelhouse.
Winkelried ’s comments paralleled the bullish pronouncements on the market segment by other industry executives, including Blackstone President Jon Gray, who called this “a golden moment for private credit."
Whether the results of credit deals signed today prove golden over the long term, these comments show firms stand eager to expand in one of the few areas where fundraising remains strong.
Replacing Regional Banks?
The last banking crisis, from 2007 to 2009, turned out to be perhaps the best thing that ever happened to private equity. It let firms buy valuable assets cheaply and move into territory abandoned by traditional banks, setting the stage for more than a decade of rapid industry growth.
The bump from the current regional-banking turmoil could be more modest, executives suggested. But nearly all took the view that the crisis set off by the failure of Silicon Valley Bank would help their credit businesses expand. Once again, the industry sees an opportunity to step in as banks fade out.
KKR co-CEO Scott Nuttall said he sees “a real opportunity to continue to scale [the firm’s credit] businesses, especially in this environment where the traditional banks are pulling back." Apollo CEO Marc Rowan said that “given what’s happening in regional banking," he expects the business of providing commercial credit to shift further toward private investors and away from banks.
These statements seem to reinforce the view that private-equity firms are following a different crisis playbook than in 2008, when many invested directly in the banking sector.
This time around, leaders of private-equity firms say they aim to replace banks rather than back them with investments.
Valuations Stabilize
First quarter results may have reduced suspicions about asset-valuation inflation.
Private equity’s results over the past year have inspired skepticism about how firms value what they own. As securities markets fell last year, private-equity asset valuations typically fell less, or even rose.
Some institutional investors questioned whether firms were putting a thumb on the scale, giving overly rosy valuations to impress clients and maintain paper returns. Regulators and even members of Congress have raised concerns.
The results of publicly traded firms for the first three months of the year may quiet these concerns. Private-equity asset valuations generally lagged prices reflected in securities markets in the first quarter, rising less than stock indexes.
The MSCI World index—a decent comparison for a globe-spanning buyout shop’s portfolio—rose about 7% in the first quarter. Blackstone’s private-equity portfolio appreciated 2.8%, TPG’s 3%, and KKR’s and Carlyle Group’s each rose about 2%.
These results show that private-equity valuations, whatever their level of accuracy, don’t always flatter firm performance. If asset prices set by public firms reflect those in the broader industry, recent worries about valuations could subside.
