This summer’s volatile market has taken its toll on private equity firms, reports The Economist. Over the past month, for example, Apollo has fallen by 21%, KKR is down 29%, and Blackstone is down 33%
And without signs that the economy will stabilise, PE firms will continue to get pummelled from all sides.
On one hand, the companies PE firms own are vulnerable during economic downturns because they’re leveraged. At the same time, cashing in on investments through IPOs is harder for PE firms to do. Four were canceled in August alone.
Right now, firms are selling whatever they can, as quietly as they can, which could change the face of the industry. The Economist writes:
In the near-term more private-equity firms will take minority stakes in each other’s companies, says Michael Magliana of Moelis & Company, an investment bank. For example, in June 2010 Blackstone sold a 28% stake in Merlin, a theme-park operator it owns, to CVC, another private-equity firm. This kind of transaction lets firms retain a piece of their investment until markets swing back. Already, secondary transactions, in which private-equity firms sell whole investments to each other, make up a quarter of deals by value, according to Preqin, a data provider.
That means some firms are bound to kick the bucket. According to a survey by Coller Capital, investors in the industry think that one in five firms will not survive these times. So who’s it going to be?