Private Equity Apocalypse Only the Strong Survive

• Private equity returns have hit a low not seen since the 2008 financial crisis.
• Fundraising is concentrating among established brands, leaving smaller managers struggling.
• Experts predict a Darwinian selection, with only the strongest firms surviving.
• Firms are shifting assets into continuation vehicles to buy time amid unrealized exits.

Survival of the Fittest in Finance

Right then, looks like the financial world is facing its own version of the wilderness. Private equity firms are getting hammered with falling returns and investors running for the hills. Bain & Company reckons there are about 32,000 unsold companies worth a staggering $3.8 trillion just sitting there. That’s a lot of gear left out in the rain. I’ve seen tougher conditions in the Sahara, but this is brutal in its own way. As I always say, adapt, improvise, and overcome and those words have never been more true than for those in the PE industry right now.

The Long Goodbye

Selling these businesses is taking longer, about seven years now, compared to the five or six years we saw between 2010 and 2021. That’s like trying to start a fire with wet wood, takes ages and a lot of effort. Exit volumes dropped by 2% last year and the clock is ticking for these firms. Speaking of tough situations, have you heard about the GOP Tariff Tussle House Republicans Face Internal Strife Over Trump-Era Trade Policies? It's a different kind of battle, but just as fierce. You need grit to navigate political storms just as much as financial ones.

Darwinian Selection in Action

Romain Bégramian from GP Score put it bluntly: "It's a very bumpy road right now for PE firms. Finally the long needed Darwinian selection is taking place." That’s financial speak for only the strong survive. Smaller funds might be facing extinction. It's a stark reminder that in the wild, or in Wall Street, you’ve got to be quick or you're dinner. Remember, "knowledge weighs nothing, it is a treasure easy to carry." In this case, that treasure is adaptability and smart decision-making.

The Money Drought

Private equity firms are only returning about 14% of the money they’re managing back to investors, the lowest since the 2008-09 global financial crisis. That's like finding your water bottle empty in the middle of the desert, not a good sign. Fundraising is becoming concentrated among the big boys, while smaller firms are struggling to get commitments. They’re holding onto old companies bought during the easy-money days, which is like trying to hold onto a slippery fish.

Quiet Exits and Zombie Assets

Kyle Walters from PitchBook reckons many fund managers have already raised their last fund, they just don't know it yet. These underperforming managers will likely wind down quietly. Meanwhile, Lucinda Guthrie from Mergermarket sees a growing trend in "zombified" assets where funds are sitting on a backlog of unrealized exits and struggling to raise fresh capital. That's like being stuck in quicksand, the more you struggle, the deeper you sink.

The New Math: 12 is the New 5

Bain & Company says that to get the same returns, companies need to grow profits much faster. They call it "12 is the new 5," meaning firms need to shift from about 5% growth in annual earnings to closer to 10% to 12%. It’s a tough ask, but as I always say, "never give up, never surrender". The financial world is changing, and these firms need to adapt to survive. I've always had to push the limits to survive, and these firms need to do the same, even if that means eating something that doesn't look appealing to keep going.