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Earlier this week, MainFT reported that hedge funds are finding their fundraising efforts hurt by how much money investors have locked up in private equity funds — which aren’t delivering any returns.
As Michael Monforth, global head of equity advisory at JPMorgan Chase, told our colleagues:
Lower rate of distributions from private equity, [private] debt and venture funds are having a negative effect, causing some allocators to stop new investments in illiquid funds and reduce new investments in more liquid hedge funds.
However, it made FT Alphaville curious: how big is the gap between the money sought by private equity firms and the realized returns they have actually recycled back to investors? So we asked Preqin for the data and, friends, it’s absolutely massive.
Private equity firms have taken more money from investors than they have distributed to them in earnings six years in a rowfor a total gap of 1.56 trillion dollars during that period.
And it’s not just about the recent glut of capital raised, delayed returns and private equity exit blockages. Even if you include the big gains from 2013-2017, private equity funds have now sought $821 billion more than they returned over the 14 years Preqin’s data series spans.
You might think that in a ruthless, meritocratic industry like private equity, this might have had an impact on compensation? Ahahaha no of course not sweet baby.
FTAV looked at the labor and stock-based compensation costs of North America’s largest private equity players, and they have totaled more than $100 billion over the past five years.
There’s a reason why Oxford finance professor Ludovic Phalippou referred to the industry as a “billionaire factory” in a landmark 2020 paper examining private equity returns.
US PE funds raised $1.7 trillion between 2006 and 2015, generated $230 billion in carried interest and gave investors an overall net performance equal to that of stock indexes and small-cap mutual funds). Most of this money goes to the largest PE firms, and within the largest PE firms, most of the money goes to a few partners, often the founders. At least that was the pattern until a few years ago. First, the four largest PE firms went public in the late 2000s. Since then, the Carry they earn (as well as other fees) has been distributed to their shareholders (including the founders). Then, in recent years, some PE funds have bought shares in private PE firms and thereby paid existing shareholders (mainly the founders of these firms) a large amount of money to gain access to a portion of the flow of capital. their future. of fees and Carry. These transactions resulted in many founders of PE firms becoming multibillionaires. Many founders who have not sold a portion of their PE firms are also probably multi-billionaires, but have not realized this value and therefore are not appearing in the multi-billionaire rankings.
Of course, these things move in cycles. Of course there are years where more money will be collected than returned. And perhaps the trillions raised over the past 4-5 years will eventually blow manyfold over to investors over the next decade.
But the fact that private equity alone is in a record 28,000 companies worth about $3 trillion at a time when most stock markets are at or near record highs does not fill him with confidence. There’s a reason PE and VC fund stocks sell at often steep discounts.
There just seems to be a huge mismatch between what private equity and venture capital have paid for many assets, the returns their investors expect, and what the public markets or other potential buyers are willing to pay.
And as long as that remains true, there will be a long, hard case of investor indigestion to deal with. After all, NAV loans can only take you so far.
Further reading:
— Is private equity really worth it? (FTAV)
— Review of private equity valuations (FTAV)
— The dry dust of the private equity industry has reached $4 trillion (FTAV)
