Private equity stakes in takeover firms contract as financial markets collapse

Private equity assets in some of the largest acquisitions companies are starting to contract as a sharp decline in financial markets and a slowdown in new investment by institutional investors lead to a decline in assets under management.

Most U.S. publicly traded buyout firms, including KKR, Carlyle Group, and Apollo Global, reported a decline in assets within their private equity units in the second quarter as they sold investments at a faster rate than how much they could have raised new liquidity from institutional investors.

Executives have warned shareholders that pensions and endowments, suffering heavy losses in public markets, feel overexposed to acquisitions. In response, these institutional investors are slowing the pace of new investments, increasing the difficulty of fundraising.

“[On] on the fundraising front, it’s getting harder out there, ā€¯Jonathan Gray, president of the Blackstone Group, told shareholders during an earnings call.

Such comments have become a common refrain among private equity executives. “The fundraising market is challenging right now and this may persist for a while as limited partners adjust to market dynamics,” warned Kewsong Lee, chief executive officer of Carlyle Group.

Assets under management within Carlyle’s private equity division fell 1% to $ 167 billion from the previous quarter. KKR reported a 2% decline in its private equity assets, while those assets at Apollo Global fell more than 3% to $ 83 billion.

The figures underscore a cooling of the once scorching acquisition market as the war in Ukraine and rising interest rates wreak havoc on investor portfolios.

Over the past decade, companies have been making acquisitions at a rapid pace and have maintained their growth by rapidly reaping larger and larger pools of new liquidity from investors.

Last February, the Carlyle Group announced a goal of attracting $ 130 billion in new funds for the New York and Washington-based group by 2024, while Blackstone expected in January to raise $ 150 billion in new funds by mid-January. of 2023.

In both cases, analysts expressed doubts that they would achieve the goals. Both are still on track to do so, although they have recognized that this level of fundraising is becoming increasingly difficult in today’s environment.

Blackstone countered the declining trend in private equity assets by posting a 3% increase in the second quarter. Apollo, meanwhile, raised $ 13 billion for its first flagship acquisition fund since co-founder Leon Black’s departure after the quarter ended in July.

The slowdown in fundraising for the acquisition of funds has underlined the importance of diversification, with many companies owning gigantic investment operations in areas such as senior floating rate loans, real estate and inflation-linked infrastructure concessions that may also benefit from the rate hike.

These units have stimulated continued growth of companies, protecting them from the collapse of stock markets and a sharp slowdown in overall trading and initial public offering activity.

This quarter, Carlyle joined KKR, Apollo and Blackstone in seeing its private equity unit retire as its largest paid business area. Carlyle’s credit business is now its largest division under that measure.

At Blackstone, real estate investments once represented a small portion of the total assets, but are now the company’s largest business. In the second quarter, Blackstone’s real estate funds attracted nearly $ 50 billion of new money, bringing the unit to $ 320 billion in assets, more than a third of its total $ 940 billion in assets.

Companies are also moving beyond institutional investors to raise new assets and build large insurance operations that invest policies in credit-oriented investments.

Last year, KKR acquired insurer Global Atlantic, a unit that now represents $ 119 billion in total assets. “The vast majority of the capital we are raising right now is in credit and real assets, where we continue to see a good amount of interest,” said co-chief executive Scott Nuttall in an earnings call.

In January, Apollo acquired Athene, the reinsurer that CEO Marc Rowan built in the years following the financial crisis. The unit, which attracted a record $ 12 billion in new business during the quarter, represents 43% of its $ 515 billion in assets.

Buyout companies are also building new products designed for individual investors who want to limit their exposure to public markets.

Apollo acquired registered investment advisor Griffin Capital this year to help market its funds to wealthy investors. This month it launched a $ 15 billion fund, called Apollo Aligned Alternatives, tailored for wealthy investors.

Blackstone has been most successful in attracting investment from individuals, attracting over $ 350 billion for strategies designed for such investors.

Although Blackstone attracted $ 12 billion in net new money from wealthy investors, it worried analysts by reporting nearly $ 3 billion in redemptions. The redemptions, combined with the company’s forecast of a slowdown in inflows, caused its shares to drop after posting earnings.

Co-founder Stephen Schwarzman brushed aside fears that growth is peaking.

“We have a sense of the future that is obviously not shared by the market today,” said Schwarzman, who pointed out that the company attracted $ 88 billion of new cash during the quarter as mutual fund companies bleed. money.

“We’re not bleeding,” he said. “I’ve been there many times and at the end of the day, we have the upper hand.”

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