Monitor

2023 Recap: Private Capital Monitor 05/01

10th January 2024

2023 RECAP (US)

Welcome to the first private capital monitor of 2024, returning with a further reflection in 2023. While H/Advisors Maitland concluded the year with a look back through a European lens, this week, H/Advisors Abernathy kick off the year, giving us a US perspective on what happened in 2023. 

From the potential divestments from public pension funds tied to ESG concerns, to interest-rate-fuelled bankruptcies among private equity-backed companies, Blackstone’s milestone as the first $1 trillion private equity manager and complications in hospitals acquired by private equity, there is yet more to reflect on from 2023.  

As an international agency, we look forward to guiding you through what’s set to be a rollercoaster of a year in the world of private capital. 

Q1 Jan – March 

• In response to the anti-ESG sentiment expressed by top Republican officials, several prominent private equity firms contested the potential laws that propose public pension funds divest from money managers who incorporate ESG considerations into their investment strategies. [Link]  
• Some U.S. public pension funds, including Maryland’s retirement system and Alaska’s state fund, relocated their investments to reduce exposure to private equity in favour of low-risk bonds. [Link] 
• Thomas H. Lee, the private equity leader who became famous for his takeovers of Snapple and Warner Music, died in February 2023 at the age of 78. [Link]  

Q2 April – June 

• In May 2023, TPG announced plans to acquire asset manager Angelo Gordon at a time when private capital firms were considering acquiring peers to help expand into new business lines or geographies. [Link] 

Q3 June – September 

• Rising interest rates and credit tightening led 54 private equity or venture capital-backed companies to file for bankruptcy protection in the first half of 2023, putting the sector on track for the most portfolio company bankruptcies seen since 2010. [Link]  
• In July 2023, Blackstone announced that it had become the first $1 trillion private equity manager. [Link]  
• Under the guidance of Federal Trade Commission (FTC) Chair Lina Khan, the FTC challenged roll-ups, when private equity firms acquire multiple small companies and then combine then, through a lawsuit against Welsh, Carson, Anderson & Stowe and US Anesthesia Partners. This September 2023 lawsuit is the latest example of the FTC’s increased scrutiny towards private equity investment in healthcare. [Link] 

Q4 October – December   

• A December 2023 study published in JAMA found that hospitals which were acquired by private equity firms had an increase in inpatient complications as compared to similar hospitals which are not owned by investors. However, the study also found that patients at private equity-owned hospitals were no more likely to die. [Link] 
• Despite promising fundraising from firms like Clayton, Dubilier & Rice ($26 billion), Blackstone ($22.2 billion) and TA Associates ($16.5 billion) this year, private equity firms are preparing for a longer fundraising downturn as firms continue to grapple with high interest rates, limited IPO movement and an M&A slowdown. [Link] 

BACK TO 2024…. 

WORTH A READ 

Europe 

SCALE TO WHALE

Financial Times’ Lex writes on the challenges facing private equity while the IPO and deal markets continue to falter. Whilst this knock to LP liquidity has broadly impacted fundraising efforts across the buyout sector, a report by Apollo found that the 10 largest managers have roughly doubled their inflows. Lex notes these managers are well positioned to consolidate the struggling mid-market players.  

ITS GETTING TECH-NICAL

Private equity-owned software companies are entering 2024 with nearly $17 billion of distressed debt on their books. Their loans trade at deep discounts, signalling distress and liquidity fears. However, while access to syndicated bank debt may be challenged, private credit remains an option. Lazard’s Tim Donahue notes private credit can “be the elixir for companies” with enterprise value but over-extended capital structures.  

EURO-PE

IPE reports that many European defined contribution pension schemes allocate little to illiquid investments – just 0.5% in the UK and 5% in Spain/Denmark, compared to 20% in Australia. Ben Leach, head of private market solutions in WTW’s investments business, believes that via private markets “DC schemes can even more actively drive sustainable economic growth, support the innovative companies of the future, and provide attractive returns for their members. Young people want to build the future, and their DC pensions should build it with them.” 

WHY CREDIT WON’T CAUSE A CRUNCH

FT Alphaville’s Robin Wigglesworth explores concerns raised by UBS Chair Colm Kelleher about a potential financial crisis in shadow banking, specifically private credit. Wigglesworth, while acknowledging issues in the private credit boom, finds himself inclined to agree with Marc Rowan, CEO of Apollo, who argues that private credit is unlikely to pose a systemic risk due to its relatively small size and low leverage. 

US 

PE’S GOT YOU COVERED…OR NOT 

The Financial Stability Oversight Council and the International Monetary Fund recently issued reports targeting private equity’s investments across the insurance sector, reports WSJ Pro PE’s Chris Cumming. The organizations question whether the growing number of private equity investments in the insurance industry pose risks to the wider economy as well as consumers reliant on insurance policies. 

BENCHWARMERS 

In a reversal of PE’s previous M&A dominance, deal activity in this area dropped approximately 40% globally as compared to 2022 due to ongoing market strains and high interest rates, The Wall Street Journal writes. However, some experts and key players in the industry see signs of improvement for 2024. 

GET INTO THE GREEN SCENE 

Bloomberg reports that large firms such as KKR, Blackstone and Brookfield are making significant investments into companies focused on energy efficiency and reducing energy waste. This sector is expected to generate increased interest as the power and natural gas industries grapple with rising interest rates and a global energy crisis.  

WALL OF MONEY  

Goldman Sachs AM closes life sciences fund at $650m 

The new fund – West Street Life Sciences I – will make investments in startups related to the life sciences sector. Specifically, the fund will target early to mid-stage therapeutic companies with multi-asset portfolios as well as tools and diagnostics firms. 

Forward Consumer Partners closes debut fund at $425m hard cap 

Launched in June 2023, Fund I attracted support from a diverse base of global investors. Forward held a single close for Fund I. Forward’s core strategy will make majority equity investments of $25m to 100m in growing and well-positioned consumer brands.  

Banner Ridge surpasses predecessor with $2.15bn secondaries fund close 

The close was well above its $1.4bn target and is 115% larger than its $1bn predecessor.  

MEDIA OF THE WEEK  

Edward Suh, Alpine Ventures shared his outlook on the VC industry via twitter. The tweet begins saying… 

DEAL CHART 

MOVERS AND SHAKERS  

Biopharma specialist GP Jeito Capital has promoted operational investor and chief commercial officer Ksenija Pavletic to partner investor. 

Harvest Partners has promoted Shane McHugh to principal and Claire Simon to vice president. McHugh and Simon both joined Harvest in 2021. 

Stonepeak announced that Jack Howell and Luke Taylor have been named Co-Presidents of the firm.  

Clayton, Dubilier & Rice announced the appointment of Howard Ungerleider as an Operating Advisor to CD&R funds. 

FROM THE HORSE’S MOUTH 

“The market should see more private credit financing where there is real enterprise value but the company is saddled with a capital structure and terms that do not currently work […] Private credit can be the elixir for companies.” – Tim Donahue, global head of Lazard Capital Solutions. 

“The last time I remember a slowdown to this degree was in 2009 … There is a growing recognition that this can’t go on for much longer.” – David Kamo, global head of financial sponsor mergers and acquisitions at Goldman Sachs. 

“You must see with eyes unclouded by hate. See the good in that which is evil, and the evil in that which is good. Pledge yourself to neither side, but vow instead to preserve the balance that exists between the two.” –  Hayao Miyazaki, Japanese filmmaker and founder of Studio Ghibli, born on this day 1941.