Private market dealmakers attending SuperReturn in Berlin this week are likely to be handed a short but sharp to-do list by their investors: Give us our money back.
And the annual gathering in the German capital arrives with more of the industry’s biggest names finding that task to be a challenge.
In the hitherto booming market for private credit, money managers including Blue Owl Capital Inc, Apollo Global Management Inc, Blackstone Inc and Cliffwater LLC have restricted redemptions amid concerns about the quality of certain loans sitting in portfolios.
Buyout houses, meanwhile, continue to struggle offloading assets. Bloomberg-compiled data show that the value of sales by private equity firms is down by around a fifth this year, frustrating investors that want to see cash returned before hearing pitches about new funds.
Much of the discomfort stems from a selloff in software companies that have long been a favorite of private capital providers, but which are under threat from emerging AI tools. Added to this is the ongoing war in Iran that’s bringing inflationary pressures that make it harder to value assets.
This sets the scene for what could be some tricky conversations between firms and their backers in and around the InterContinental Hotel in the coming days.
“At the beginning of the year, people were just incredibly optimistic,” said Xavier Robert, chief investment officer at Bridgepoint Group Plc. “Recent macroeconomic and geopolitical developments have meant we need to revise our expectations.”
The year began with M&A booming and expectations that central banks would cut interest rates, creating healthy conditions for firms to buy and sell assets and credit providers to help finance transactions.
The mood shifted quickly when investors started dumping software stocks because of fears that AI tools from the likes of Anthropic PBC would render traditional software-as-a-service companies obsolete.
Private equity firms invested more than $1tn in the sector over the last five years, with many deals struck at rich valuations during the 2021 M&A boom. Now, they’re facing questions about whether these assets are sellable.
“It can be difficult to transact those deals today because of all the noise around AI,” said Douglas Hallstrom, a managing director at Advent. “There’s mounting pressure though to monetize this backlog of 2021 deals, even if they can’t be crystalised at peak valuations.”
Firms like EQT AB and TA Associates had to pull exits of some software assets. Others, such as Thoma Bravo and Vista Equity Partners, have been working to reassure investors. And last week, Partners Group Holding AG capped withdrawals at one of its evergreen private equity funds in the first big sign that anxiety in credit is spilling over to other asset classes.
Executives at some top firms say investors are now telling them to go easy on software deals.
“You’ve got limited partners that say we have enough software exposure, so we don’t want you to add to that,” said Bert Janssens, co-head of EQT’s private capital business for Europe and North America. “We’re in a little bit of a freeze zone.”
The impact of AI will be one of the main points of discussion on panels and in side rooms at SuperReturn. Victor Khosla, CIO at Strategic Value Partners, Christian Lucas, managing partner at Silver Lake, and Thoma Bravo co-founder Orlando Bravo are among those scheduled to debate the technology at the event.
Hallstrom at Advent said private capital providers shouldn’t let the software shock spook them into stepping away from tech more broadly as the world transitions to a machine-led economy.
“There’s a real opportunity for those of us that still have the mandate to invest in AI winners,” he said. “Not investing now could be an even costlier mistake than investing at the height of tech dealmaking in 2021.”
Faced with the reality of having to hold assets for longer than they’d like to, private equity firms have been coming up with creative ways to allow impatient investors a chance to cash out. Strategies have ranged from continuation vehicles to minority stake sales rather than full exits.
These efforts have not been enough to prevent a slump in allocations to the industry. Figures from Preqin show that distributions to paid-in capital — a key performance metric for private equity — have been falling steadily. As a result, raising money for new funds has been tough across most sizes, the Preqin data show.
“LPs increasingly want a credible path to liquidity rather than complex financial engineering,” said Maximilian Mahn, head of portfolio management at wealth firm HNW Family Office AG.
One model that’s become popular is evergreen funds — open-ended vehicles offering periodic liquidity and no set timeframe for investment. Hamilton Lane Inc has estimated these will account for almost 20% of total capital in private markets by 2035 as firms use them to draw in more ultra-high-net-worth individuals.
The recent move by Swiss manager Partners Group, however, to gate a multibillion-dollar evergreen fund has highlighted again the more skittish nature of non-institutional capital during periods of volatility.
Fabio Osta, head of the alternatives specialists team in Europe, the Middle East and Africa wealth at BlackRock Inc, said evergreen funds are designed to provide liquidity periodically and not on demand. The onus is on managers to help investors “navigate complexity with greater confidence through clear education,” he said.
But as the private capital elite prepares to restate its case with investors in Berlin, Alberto Gallo, CIO at Andromeda Capital Management, said their industry faces more existential questions.
“At the core of the private capital equation is a broken promise. These managers have promised higher returns than they can deliver,” Gallo said. “While you have many ways to delay losses and reduce transparency given the freedom you have to not mark to market your assets, at some point, the bill comes. And we’re getting there.”
