(Still) no exits for private capital

Daily Data: No exits, no worries, probably

In today’s dispatch:

• Still no exits in private capital

• a big deal that hasn’t really been much of a big deal

• capital calls running hotter than distributions

• even the belle of the ball is having some trouble fundraising

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(Still) no exits for private capital

The lack of liquidity in the private markets continues to be a big deal that hasn’t really mattered much yet.

What I mean is that there is a huge amount of wealth tied up in private investments that exists in theory, but not (yet) in practice. Likewise, there is an entire model for wealth creation (and a generation of investors and managers trained on that model), which may or may not be any good anymore.¹

For all their past successes (and current reputations), however, the financiers of private capital have not yet demonstrated that they can succeed in an environment where capital is no longer cheap and plentiful, i.e. the here and now.

To succeed, requires liquidity—exits, M&A, IPOs, etc.—and there just haven’t been much of those lately.

The thing is that buyers are much less interested in smaller, loss-making, riskier and/or slower-growing companies than they were before. Or rather, given their own financing costs are higher, buyers need to be much more impressed to justify the prices these companies used to fetch (and would represent solid returns for investors).

As Uncle Warren just said, “when I look at what's available . . . we find [cash] quite attractive right now.”

You know who really isn’t buying what Finance Bros are selling? Other Finance Bros:

Source: Pitchbook

Sponsor acquisitions, i.e. where one investor buys some other investor’s portfolio company, just aren’t happening.

So, while the Finance Bros say they’ve still got it, they refuse to prove it, and we don’t actually know.

Now, to be fair to the private capitalists, no one has been able to demonstrate that they cannot succeed, either. Just because they haven’t returned much capital to their investors yet, doesn’t mean they won’t eventually. “Private assets are illiquid and low vol . . . we wait, until the time is right, don’t you worry your pretty little heads.”

That very well may be.

LPs are (mostly) patiently waiting for their money

So for now, it’s a waiting game.

It’d be a pretty big deal if the wolves off wall street had suddenly lost their mojo (devastating to both the myth, and the value of the assets they currently manage). But it hasn’t mattered yet (a) because we can’t actually confirm that it’s true, and (b) because we’d very much prefer that it not be true, so better to coast on pre-ZIRP track records, and the ongoing Schrödinger’s Cat phase of interest-rate uncertainty.

No one is panicking, but the amount of money that PE/VCs have returned to investors is staggeringly small: