Checking in on extend and pretend

Daily Data: PE unsold assets achieve all time high valuations! Can you believe it?!

In today’s dispatch, checking in on extend and pretend across private capital:

• PE unsold assets hit “record high” values. Amazing!

• The cash-flow J-Curve has some ominous look-alikes

• VC assets are also unsold

• 2024 is the year of the maturity for office CMBS

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Daily Data: Checking in on extend and pretend

If you haven’t had to sell or refinance in a higher rate world, then you don’t. Instead, you wait for rates to come back down, and in the meantime, you find ways to kick the can down the road, telling everyone “that everything is fine.”

Extend and pretend.

And if rates do come back down, you will sigh a big sigh of relief, because you were right all along, you big captain of industry, you.

But if not . . .

Private Equity is extending and pretending

Private Equity funds are sitting on $3.2 trillion worth of companies that they haven’t sold.

It’s kind of amazing that PE funds are hoarding so much unrealized value because elsewhere returns have been hard to come by.

Deal value fell, exit value fell and fundraising fell . . . but un-sold assets appreciated right on trend.

No, seriously look (via Bain):

Less deal value, less exit value, less fundraising . . . but asset values go up and up!

Despite all the evidence that there’s much less interest in whatever it is they’re selling, PE assets just keep going up and up! It’s a “record high!”

Well, the assets they don’t sell go up and up, at least.¹

Amazing!

Is it magic? No, of course not.

It’s very high stakes extend and pretend.

These funds would say (not incorrectly), “well, the reason we haven’t sold these assets is because once rates go down again, we’ll be able to get much more money and be very smart investors again, so we’re just going to keep on waiting, and in the end, you will see that we’re right.”

And they may well be right.

Of course, if rates don’t go down . . . well, it will turn out that the “value of aging unexited companies” most definitely did not “hit a record high.” No, that claim will seem very silly in retrospect. Instead of an upward sloping line, the value chart will be down-and-to-the-right with its three other chart friends.²

Now, that being said, if you’re a fund manager who capitulates too early, and rates do come back down, you look like an idiot for selling low. If you capitulate early, and rates don’t come down, well, you lose a little less money than everyone else, but you still lost money.

If, however, you wait with everyone else, and you’re all wrong together, well, you’re just as wrong as everyone else.

So, from a manger’s perspective, ‘extend and pretend’ is the sensible choice.

LPs though, are starting to get a little antsy. They need to get some returns.

The PE “j-curve” is starting to look alarmingly steep: