Private Equity as we know it is finished. I can see this first-hand since I work in a private equity fund myself.
Like any business model in finance, it has had its humble beginnings, its vintage years and it is now experiencing a slow come-down. As a result you can forget getting hired into PE if you are hoping that it’ll become your way out of a tedious banking or accounting role.
PE is no longer an industry where the only exit strategy is an MBA or early retirement. Juniors at various funds have been paid little or no bonus for one or even two years in a row. For the first time ever they fear for their jobs.
I was told an interesting story last week over a pint with a lawyer who has spent most of his career working for financial sponsor clients. Unusually, he’s seen no associates at any of the corporate hospitality events this summer – since there are so few deals around, senior dealmakers are taking up all the box seats at the opera, cricket and the races.
PE has never been rocket science. You need three things to make your returns work; growth in cashflows, high leverage and multiple expansion. None of those three factors have been much in evidence since 2008 at the very latest. Furthermore, no-one really knows when they are coming back, regardless of what greyhairs like David Rubinstein (Carlyle), Henry Kravis (KKR) or Ronald Cohen (Apax) say publicly.
High profile casualties have already included Terra Firma, Candover and 3i. And even those funds whose portfolios are still rumoured to be in good shape are quietly taking the principals responsible for the weaklings on their books outside and shooting them. Interestingly, since most of their assets are by definition private and unlisted we are now seeing funds which co-invested in companies reporting sharply different valuations for those same investments.
Quite apart from individual deal chemistry, the asset class is falling off a cliff. The fundraising cycle has slowed, investors are less willing to commit new capital than ever before and are asking for some of their original funds back first. Exits are increasingly hard since public markets are sceptical of buying shares in firms PE has already ripped all the costs savings out of. The ‘asset-stripping’ label, coined in the 1980’s, has stuck.
And even if you manage to make money, bonuses paid out as carry are likely to be subject to a newly higher capital gains tax and may need to be further deferred (as if waiting for carry to vest wasn’t already a deferral).
Conventional wisdom has it that success nowadays in PE requires a niche angle – emerging markets, operational tune-ups etc. I hope that’s the case, or a return to investment banking beckons.
The author is a former M&A associate now working in a private equity fund