私募股权跑输公开市场：高利率时代策略失效

Westin: This is a story about beating expectations. For years, private equity has been an important tool in the investor's toolbox because of its ability to deliver better returns than public markets, not to speak of what it's meant for entrepreneurs like Dan Namerow, who built his own electrical company, never expecting private equity to come knocking on his door. -When I started my business, having an end goal was not even a thought in my mind.

I had no idea about business, never for a second. If I was approached in year one by someone who said, "Dan, you're going to sell this business "in 8 years for millions of dollars," I would have simply laughed at them. Westin: And then private equity arrived. -First, I thought it was a joke. I thought it was a scam. I, within 8 years, was going to almost 12x my EBITDA and become a newly minted millionaire. Westin: But that payday came with a tradeoff Dan says he did not fully understand. -I do not want to disparage the company that acquired mine, but I can say that no matter what an owner thinks is going to happen, they need to take a step back and look at the reality of things.

And what I mean by that is you are no longer in control of your business. It absolutely 100% hurt not only my soul, but the soul of the business. Westin: Dan's experience is one founder's account of one deal, not a verdict on private equity as a whole. And for Namerow, timing was everything. He sold at the top, when cheap capital and rising evaluations fueled demand for companies like his and justified high prices. Private equity buyers could pay those high prices because they could generate returns simply off of the financing.

But all that has changed. -The role of private equity is to provide, hopefully, outsized returns relative to what could be gotten in the public markets. It's to provide incrementally higher returns and, therefore, raise the returns on the whole portfolio. Westin: According to a report by Bain, private equity deals, fundraising, and payouts to investors surged in 2021, fueled by COVID-related stimulus. But then dealmaking slowed in 2022, forcing private equity managers to return fewer profits to investors.

Steven Rattner has spent much of his career in and around private equity. He is now chairman of Willett Advisors, which manages the personal and philanthropic assets of our founder and majority shareholder, Michael Bloomberg. Rattner says changes in the market have made the case for private equity less straightforward for investors. There was a time when interest rates were near zero, where there was sort of a crying need for outsized returns.

We now have positive interest rates. Has that reduced some of the attraction of private equity? -Yes, in two ways. First, any time interest rates go up, the attraction of equities goes down, because if you can invest in a fixed-income security and get an interest rate of X, and that's high enough relative to what you think you're going to get with the volatility and risk associated with equity securities, you're going to migrate toward fixed income.

With respect to private equity specifically, there's an additional issue, which is that private equity is heavily financed with debt, and therefore when rates go up, the ability to make the numbers work, so to speak, on a private equity investment gets harder because, because, in effect, your costs have gone up. And so you can't pay as much for the company and still make the kind of return you were hoping to make. Westin: Steven Kaplan, a professor at the University of Chicago Booth School of Business, has studied private equity for decades.

As you know so well, markets go up, markets go down, rates go up, rates go down. But as you look at it, to what extent was private equity doing artificially well because we had historically low interest rates? I mean, approaching zero interest rates. Did that distort the process? -I don't buy that so much. Private equity really outperformed for a long period of time in all interest rate environments, and I think the, you know, the late 20-teens, rates were low, and maybe that was a help.

But the private equity firms also benefit from improving their companies, and the public markets also benefited from the lower interest rates. So, you know, it's sort of... As an apples-to-apples comparison, that's why I like just looking at how the private equity does relative to the public markets and the S&P 500 in particular. Because the S&P 500 is going to be affected by many of the same things. Westin: According to Professor Kaplan, an analysis of U.S. buyout funds shows that private equity largely delivered on its promise of beating public markets for decades, from the 1990s all the way through 2018.

But since 2019, that pattern has reversed, in part because big tech's remarkable rise has pushed public market returns higher, and in part because the higher prices generated during the boom days have made it harder for investors to get their money out. The ultimate goal, by and large, is to sell the company at some point. That has become more difficult in recent years, perhaps in part because of the increase in interest rates.

Certainly we talk to limited partners who say, "Wait, I'd like my money back now," and the general partner's saying, "Oh, no, no. "It's too soon, I'd like to hold on for a while." What's the problem with Exit right now? The deals in 2020 and 21, they paid high prices, then they got hit by interest rate increases, and those deals are not doing so well. And I think a number of the private equity firms don't want to sell, because they think if they hold it longer, they'll be able to get a higher value.

And as a result, they're not selling, and so realizations, or what they call in the industry, DPI, which is distributed capital per invested, is on the low side, and that's what LPs are complaining about, rightfully so. Westin: PitchBook reports that the backlog of companies held by private equity firms has now reached over 33,000, up from only 19,000 a decade ago. And with less support from cheap leverage and rising valuations, private equity firms are increasingly being judged on what they can actually do with the companies they buy.

Andrew Weinberg, founder and CEO of the private equity firm Brightstar Capital Partners, says 2022 represented a fundamental shift. -I think 2022 was an inflection point for our industry. If you look at the prior 20 years, if you bought something and grew it a few percent a year and took on some leverage and had multiple expansion, that was a great return. And I think the Bain Research Report did a great job of chronicling this and then said, "OK, here's the new norm post-2022, "which is the old 5% growth "is really now a 12% bottom line growth "to achieve the same return that one did before."

I love it personally, because I've been waiting for this market. I've been waiting for a market where the investor can differentiate between the manager that is purely focused on leverage and multiple expansion to the manager that is focused on operational value add and the application of AI. So in terms of being ready for this environment, we've built Brightstar to be ready for this environment. We have a deep team of not only investors, but operators who have experience in the space to do it.

And I think what the investor is going to end up seeing is a much bigger differentiation or distribution of returns from managers based upon who has built their firm for this environment. Westin: As performance pressures for private equity funds grow, investors increasingly focus on issues like how they get their money out and what fees they're paying. Jason Tyler, President of Wealth Management at Northern Trust, helps wealthy families and family offices navigate the changing investment landscape. -Now the fund sponsors are coming up with, first of all, they're trying to get to new investors that didn't typically have either the interest or the ability to