Episode summary
The Private Equity Boom Hits a Reality Check
Wall Street Week
· · 11 min · Hosts: Chrystia Freeland · Guests: Steven Kaplan
Summary
Private equity’s long run of easy wins is under pressure as higher interest rates, slower exits, and richer entry prices have changed the math. The episode contrasts the life-changing sale of Dan Namerow’s electrical business with the tougher environment now facing buyout firms, where leverage no longer does as much of the work and managers are expected to create value operationally.
Steven Kaplan says U.S. buyout funds beat public markets for decades, from the 1990s through 2018, but that advantage has reversed since 2019. He points to stronger public-market returns, especially from big tech, and to the difficulty of exiting deals struck in 2020 and 2021 at peak valuations. The result is a rising backlog of companies held by private equity firms and more pressure from limited partners waiting for distributions.
The discussion also emphasized a shift in what investors want. With financing more expensive and liquidity scarcer, firms are being judged less on leverage and multiple expansion and more on whether they can improve businesses, use operators well, and justify fees. Some managers say that favors firms built for operational value creation rather than financial engineering.
Key takeaways
- Steven Kaplan says U.S. buyout funds beat public markets from the 1990s through 2018, but the pattern has reversed since 2019.
- Higher interest rates make private equity math harder because debt costs more and firms cannot pay as much for companies.
- PitchBook says the private-equity backlog has risen to more than 33,000 companies, up from 19,000 a decade ago.
- Andrew Weinberg says 2022 was an inflection point because 5% growth plus leverage and multiple expansion no longer produces the same returns.
- Jason Tyler says some investors want more liquidity and lower fees, while others are exploring direct investing to avoid fund costs.
Notable quotes
“private equity has been an important tool in the investor's toolbox because of its ability to deliver better returns than public markets”
“-The role of private equity is to provide, hopefully, outsized returns relative to what could be gotten in the public markets”
“-What you're going to see is some of these private equity firms perform. Some of them don't perform. They're not going to get more money”
How the episode opens
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.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- private equity
- interest rates
- buyout leverage
- exit environment
- peak valuations
Companies and tickers mentioned
- PitchBook
Watch the episode
Watch “The Private Equity Boom Hits a Reality Check” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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