Private equity firms face worst year for exiting investments in a decade

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Private equity firms are facing the worst year in a decade for selling portfolio companies after higher interest rates and geopolitical tensions ended the buyout industry’s boom.

In the first nine months of the year, buyout firms generated $584bn from either selling companies outright or through taking them public, according to data from PitchBook.

The amount is more than $100bn shy of what the industry raised during the same period last year and almost two-thirds below the record $1.4tn generated in 2021, when borrowing costs were low and US equities still in a bull market.

Higher interest rates have hammered the market for initial public offerings and made companies wary of making acquisitions. The last time buyout firms made less cashing in on their portfolio companies was in 2013, the data shows.

The figures underline the challenge confronting private equity firms as they try to monetise their investments and return money to investors, who include the world’s biggest pension and sovereign wealth funds. Singapore’s GIC, one of the most influential investors, warned in July that a golden age for the buyout industry had ended.

One industry executive said that buyout firms were still seeking “2021 prices” for portfolio companies, while potential acquirers and public investors wanted valuations that reflected higher interest rates, the weaker economic outlook and a largely moribund IPO market.

Faced with much tougher hurdles in selling portfolio companies at prices they want, private equity firms are resorting to unconventional tactics to realise proceeds for their own investors.

They have been increasingly using margin loans and net asset value financing — secured against shares in their listed companies or their asset portfolios — to fund distributions to investors.

Private equity groups were getting “more creative” in finding ways to generate cash for their investors given the tougher backdrop, said David Martin, a partner at law firm Linklaters.

The willingness to take on more debt has drawn scrutiny from the Institutional Limited Partners Association, an industry body representing private equity investors. The group is drafting recommendations that will call for buyout groups to justify the use of these loans and disclose how much they will cost, the Financial Times reported earlier this month.

In another sign of the strains facing the industry, EQT Group, one of Europe’s largest buyout firms, this week said it was making plans to hold private stock sales for its portfolio companies given the struggles of the IPO market.

Firms are also increasingly using continuation funds, which involves a firm selling an asset from an older fund to one of its newer ones. Investors in the funds are typically offered the chance to cash out during these asset transfers.

A recent survey of 200 UK-based private equity executives found that continuation funds were viewed as a better option for private equity firms looking to monetise their deals than an IPO or running an auction of an asset.