(Still) no exits for private capital [republished]
No exits, no worries, probably
👉👉Random Walk is back in the saddle as of today, with some changes in tow that will be rolled out, gradually.
In the meantime, this should be the last repeat piece for a bit.
I chose it because it’s remarkable how much all of this is still very much the case in the land of Private Capital.
Originally published May 7, 2024:
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
👉👉👉Reminder to sign up for the Weekly Recap only, if daily emails is too much. Find me on twitter, for more fun. (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:
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:
Interestingly, PE+Buyout saw a small lift at the end of last year, while VC actually got worse.
There were a few headline deals that brought hope of relief around the corner, but it’s just not showing up in the data (yet).
It’s unsurprising then that Venture had a disappointing Q1.
VCs can’t deploy much capital, if they can’t raise capital, and they can’t raise capital, if they don’t return capital.
Eventually though, LPs are going to need some cash to meet their own liquidity needs, not to mention to honor preexisting capital commitments (to many of the same GPs who still haven’t returned much money from the first funds).
Capital calls > Distributions
For now, capital calls in PE are creeping up, more quickly than any distributions
The gap between calls and distributions is almost as wide as it was during the very end of ZIRP, when calls were cooking at all time highs.
Since then, net cash flow to PE LPs has been steadily negative:
The data is a bit dated (June 2023), but it hasn’t changed that much since then and negative net cash flow isn’t a great way to raise money for Fund IV.
Anyways, Random Walk has written about all the various liquidity hacks in the ‘extend and pretend’ playbook—and now even venture is getting into the continuation fund game too. So not all is lost, even if it’s a bit untraditional and uncertain. Adapt and survive.
Even the belle of the ball is having some fundraising issues
But even Private Credit—the grand poobah of fundraising and the only game in town—the same Private Credit, which has underwritten a lot of these NAV loans, and some buyouts, and a healthy chunk of whatever liquidity is actually out there (for both funds and their portcos), is running into some fundraising headwinds.
Q1 fundraising for Private Credit was well below expectations (and recent high watermarks):
$30B is as low as fundraising has been since 2018, back when private capital was still a very juvenile asset class, and not the new king of banking it is now.
What does it mean?
Could be ‘wait n’ see,’ could be better opportunities elsewhere, could be nothing. Don’t forget the Uncle Sam in the Room. In all events, time will tell.
As Bloomberg also points out, there’s been some high profile lumpiness recently, for what’s otherwise been stellar Private Credit performance.
[S]tress is building in the $1.7 trillion private credit market that is starting to negatively impact investment returns. Struggling companies may have to deal with constrained cash flows for longer than initially anticipated — and longer than they may be able to handle. All at a time when the syndicated debt market has come roaring back, stealing borrowers from private credit and placing further pressure on direct lenders’ returns.
Negative credit outlooks, and slashing fees as returns get light. Yeesh.
To be fair, ‘if it bleeds it leads,’ and private credit has been performing very well, but still.
There is both some choppiness on the loans made, and “race to the bottom” chase for yield competitive pressure, that’s causing some concern going forward.
That’s the thing about being the last lender standing. It’s both a great position to be in, but also a terrible one.
Previously, on Random Walk
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At least at the scale it purports to operate at.