Billionaires can’t get enough private equity

Comment this story Comment After a year of record fundraising, there are fears that the golden age of private equity is over. Banks’ sour sentiment toward buyout loans and the IPO drought is putting pressure

After a year of record fundraising, there are fears that the golden age of private equity is over.

Banks’ sour sentiment toward buyout loans and the IPO drought is putting pressure on both ends of the private equity deal machine: buying and selling businesses.

To make matters worse, pension and endowment funds – the industry’s main traditional investors – may run out of fresh money for their old cronies. The culprit is their asset allocation rules. Over the years, pension funds have increased their stakes in private equity, to maximize returns and pay pensioners’ bills. But after a global sell-off in bonds and stocks, their PE allocation could hit the cap.

Use California’s $477 billion public employee retirement system as an illustration. In November, Calpers raised its target allocation from 8% to 13%. But once we factor in the potential losses to his public assets, the change doesn’t seem so earth-shattering. A bottom-of-the-envelope calculation shows that Calpers’ existing private equity portfolio holdings could have grown to 9.5% without deploying one more dollar to alternative asset managers.

But do not worry. Private equity is attracting a new wave of investors, in the form of billionaire family offices and wealthy retail money. Wall Street banks have done their part by enthusiastically marketing private equity funds to their private clients. For example, JPMorgan Chase & Co. clients contributed $1.9 billion to Chase Coleman’s latest Tiger Global Management venture capital fund, worth $12.7 billion. The bank tapped a similar pool of clients to raise $2.9 billion for a new venture capital fund for Philippe Laffont’s Coatue Management.

Meanwhile, the ultra-rich also can’t live without private equity, according to a recent UBS survey, which surveyed the 221 largest family offices that manage an average of $1.2 billion in assets each. In 2021, these billionaire offices were already allocating 21% of their money to private equity, either through direct investments or through funds. And yet, they plan massively to keep raising their stakes as they extend their withdrawal from boring cash and bonds.

Of course, valuation is a concern. In recent years, private equity firms have largely paid off their investments. In the first quarter, a median buyout was valued at 14.6 times EV/EBITDA – or the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization – compared to 11.9 times four years earlier. early, according to PitchBook. By comparison, the S&P 500 valuation multiple fell to just 12.8.

But the wealthy don’t seem discouraged. Of those polled by UBS, 85% said they were likely to invest in start-ups this year, up from 74% in 2021. That’s right in Tiger and Coatue’s new wheelhouse. Tiger’s latest venture fund focuses more on early-stage ventures anyway, while Coatue has also scaled back late-stage deals this year as well.

Right now, private equity has become a favorite among billionaire families, with around 75% believing the asset class will continue to outperform public markets. But, alas, the only category of investors who have been kept out are retail investors. So the rich will only get richer, while everyone else chasing the big score will find themselves stuck looking for meme stocks and crypto tokens.

More from this writer and others on Bloomberg Opinion:

• Why did a fund manager call Private Equity a “Ponzi”? : Shuli Ren

• The Goldilocks era of Private Equity is coming to an end: Nir Kaissar

• Private equity woes go beyond deal freezes: Chris Hughes

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. A former investment banker, she was a markets reporter for Barron’s. She holds the CFA charter.

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