Buyout firm private equity units shrink as financial markets fall

The private equity business of some of the largest companies in the buyout space is starting to contract as a sharp decline in financial markets and a slowdown in new investment from institutional investors leads to lower assets under management.

Most publicly traded U.S. buyout firms, including KKR, Carlyle Group and Apollo Global, reported lower assets within their private equity units in the second quarter as they sold investments at a faster rate. that they could not raise new funds from institutional investors.

Executives have warned shareholders that pension plans and endowments, which are taking heavy losses in public markets, feel overexposed to buybacks. In response, these institutional investors are slowing their pace of new investments, increasing the difficulty of fundraising.

“[On] on the fundraising front, it’s getting harder and harder,” Jonathan Gray, chairman of Blackstone Group, told shareholders on an earnings call.

Such comments have become a common refrain among private equity executives. “The fundraising market is tough right now and that could linger for a bit as sponsors adjust to market dynamics,” warned Kewsong Lee, chief executive of Carlyle Group.

Assets under management at Carlyle’s private equity division fell 1% to $167 billion from the prior 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 point to a cooling in the once-hot buyout market as the war in Ukraine and soaring interest rates wreak havoc on investors’ wallets.

Over the past decade, companies have taken over at a rapid pace and maintained growth by rapidly mobilizing ever-larger pools of new investors.

Last February, the Carlyle Group unveiled its target to attract $130 billion in new funding to the New York and Washington-based group by 2024, while Blackstone predicted in January that it would raise $150 billion. new funds by mid-2023.

In both cases, analysts worried about whether they would meet the targets. The two are still on track to do so, although they acknowledged that this level of fundraising is becoming increasingly difficult in the current environment.

Blackstone bucked the downward trend in private equity assets by reporting a 3% increase in the second quarter. Apollo, meanwhile, raised $13 billion for its first flagship buyout fund since co-founder Leon Black left after the quarter ended in July.

The slowdown in buyout fundraising has underscored the importance of diversification, with many companies owning gargantuan investment operations in areas such as variable-rate senior loans, real estate and index-linked infrastructure concessions. on inflation who can also benefit from higher rates.

These units have spurred the companies’ continued growth, shielding them from falling stock markets and a marked downturn in overall trading and IPO activity.

This quarter, Carlyle joined KKR, Apollo and Blackstone in seeing its private equity unit decline as its largest area of ​​paying assets. Carlyle’s credit business is now its largest division by this measure.

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

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

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

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

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

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

Blackstone has had the most success attracting investment from individuals, attracting more than $350 billion for strategies designed for these investors.

Although Blackstone attracted $12 billion in new money from wealthy investors, it worried analysts by reporting nearly $3 billion in buyouts. The buybacks, combined with the company’s forecast that cash inflows would slow, sent its stock plummeting after it reported earnings.

Co-founder Stephen Schwarzman dismissed fears of a growth spurt.

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

“We don’t hemorrhage,” he said. “I’ve been through this many times and at the end of the day we win.”

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