Private equity firms eye a wave of investment on the shores of the French Riviera

On the golden sands of the French Riviera, right along the beach at an evening of volleyball, private equity executives huddled in a large tent in dark suits and celebrated as they did their best to ignore the crisis affecting their sector.
This week, gathered at a fair in one of Europe’s most exclusive destinations, the biggest dealmakers showed their confidence even though the conditions that fueled the decade-long private equity boom have gone in the opposite direction.
For many years, everything has gone pretty well for the billionaires in the mass buying sector. Now, as interest rates rise and their model faces its biggest test since at least the 2008 crash, private equity is eyeing what dealmakers hope their next revolution will be, an unprecedented wave of money from retail investors.
“When the markets stabilize, it will be a massive time for private equity” and the influx of retail money is a “matter of time,” not a possibility, Verdon Perry, global head of Blackstone Strategic Partners, said on the main stage of the show this week.
Acquisition groups have spent the past few years closing a record number of deals, often at staggering valuations, using an ever-increasing amount of debt. Now, they own a business whose borrowing costs are just as high as its revenues are going down.
Investors specializing in distressed debt can hardly contain their joy that these companies can get into trouble.
“For the first time since the global financial crisis and for completely different reasons, we are starting to see cracks in a real way across the board,” Matt Wilson, general manager at Oak Tree, said during a panel discussion at the show.
“Combining lower revenue, lower cash flow, higher borrowing costs is going to be a very difficult situation. We are very excited about what we see in front of us now (…) It is hard to see a smooth landing path,” he added.
While some argue that the top of the market has been reached, others have become concerned about the sector’s practices.
Mikkel Svenstrup, chief investment officer at ATP, Denmark’s largest pension fund, used his podium at the fair to compare private equity against a pyramid scheme.
He complained about the sector’s use of “continuous money”, a fast-growing model in which a private equity group sells a company to itself by moving it between two of its private funds. He said he was “looking carefully” at “all those tricks they’re doing to sort of screw up” the payout numbers.
But speaking privately on the sidelines of the show, a senior executive at a European acquisition group said he was confident “the golden age of private equity is just beginning”.
One reason for optimism is people’s search for money – unlike pension funds, endowments and sovereign wealth funds that have driven the sector’s growth so far – what prominent figures describe as the “democratization” of private equity.
Some of the money will come from the wealthy. Morgan Stanley and Oliver Wyman said in a report last year that people with between $1 million and $50 million to invest would commit an additional $1.5 trillion to private markets by 2025.
But the sector also targets people who are much lower in the income ladder.
“We are talking about actual democratization,” Virginie Morgon, chief executive of buyout Eurazio Group, said at the show. The sector will raise money from “individuals not, for example, high net worth individuals” who can invest a million euros or more, but people who have five thousand or ten thousand euros,” she said.
Ariane de Rothschild, who heads Franco-Suisse private bank, and Edmond de Rothschild, asset manager, warned of the need for “a robust governance framework to avoid misunderstanding and potential reputational damage” when ordinary investors are brought in.
There has also been talk of retail investors buying enduring money products, which are so specialized that many people in the financial field are unfamiliar with how they work.
“I find this product almost logical for retail investors in more ways than one,” as opposed to buying into private equity funds, he said
Gabriel Mullerberg is a general manager at Goldman Sachs who also specializes in deals. Then he added, investment vehicles are less volatile and more diversified.
Amid the parties and committees, executives have warned that the sector is stuck because private valuations – of companies owned by buyout groups and unlisted private equity firms – have not aligned with public markets.
“It’s been a tough year for a lot of stock market investors, it’s kind of interesting, isn’t it, because private markets still maintain their valuations (…) in the end they will converge. Whether it’s up or down, we’ll see with time.” , said Sevenstrup of ATP.
During the conference, the London Stock Exchange-listed Petershill Partners Group, which acquired it and owns minority stakes in private equity firms Goldman Sachs, posted an accounting loss as it wrote down the value of its investments.
The move highlighted how higher interest rates have made acquisition companies, which receive a steady stream of money from the management fees they charge investors, less valuable. Blackstone, Apollo Global Management, KKR, The Carlyle Group, EQT and BridgePoint have all fallen more this year than the S&P 500. It was not necessarily followed by the ratings of private acquisition groups.
Tiffany Johnston, managing director of Blue All, which buys minority stakes in private equity firms, said: “One thing we’ve been asked a lot lately is has our valuation changed or our approach to what’s happening in the public markets. It hasn’t really changed (…) We found we were only able to be very consistent.”
As insiders question the sector’s model – amid hopes of attracting retail investors – private equity firms are forming their defences.
George Osborne, a former British chancellor who was at the conference as a partner at his brother venture capital firm 9 Yards Capital, said the sector had to invest “in the long term”, looking at the energy crisis, inflation and the “problem” of the Ukraine crisis. tragic.”
Orlando Bravo, a founding partner of the Toma Bravo buyout group, which has pumped tens of billions of dollars into software deals at the height of the market in the past few years, was among the most optimistic of the event.
“The way the sector makes money is not by market timing,” he said, adding that private equity firms have done some successful deals with high valuations and failed deals on the cheap. “A big company buys when it can (…) our sector is not about buying high and selling high, it wasn’t about that before.”
But the numbers from Bain & Company tell another story. A report from the consultancy this year said that so-called “multiple scaling”, or the sale of a company at a multiple of its earnings than it was bought for, has been “the biggest driver of overall purchase returns over the past decade”.
Bravo, however, dismissed Sevenstrap’s comparison between private equity and a pyramid scheme, saying, “Oh my God, on the contrary. It’s the best way to own in the world!”