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PE sector facing years of lower returns

Private equity leaders are cautioning that the industry is likely to face years of lower returns as they work to sell off assets accumulated during the investment boom of the coronavirus pandemic, according to a report by the Financial Times.

Following a period of rapid growth and record fundraising, buyout groups are now challenged with exiting investments in unsold companies worth trillions of dollars. Many of these deals were made during the low interest rate and high market valuation period of 2021 to 2022.

The report quotes Pete Stavros, KKR’s co-head of global private equity, as saying at the SuperReturn industry conference in Berlin: “During that period, rates were low and valuations were high. These are going to be tough vintages. They’re probably going to underperform.”

As well as navigating the challenge of selling off over $3tn worth of companies as they look to investors, fund managers are also sitting on $3.9tn of un-deployed capital, or “dry powder,” according to a mid-year report from consultancy Bain & Co.

Executives at the conference suggested that the industry needs to adapt by focusing on deals where funds can drive operational or strategic improvements to generate profits. This includes deals such as carving out divisions from larger companies or investing in founder-owned businesses.

Marc Nachmann from Goldman Sachs emphasised that the industry’s previous model of paying high prices for companies using cheap debt and selling them at higher prices within a few years “won’t work in the next 10 years.”

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