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💰 Private equity struggles to sell


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Private equity firms are currently stuck with a huge $3 trillion backlog of 28,000 companies they can't sell, mainly due to high borrowing costs. The slow transaction market has triggered diverse reactions within the legal sector, with some firms scaling back due to fewer deals, while others are strategically hiring, betting on a future uptick in private equity activity.


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💰 Private equity struggles to sell

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What's going on here?

Private equity (PE) firms were left holding a record number of unsold assets at the end of last year.

What's private equity?

Put simply, this is how PE works:

  1. First, PE firms gather money, often supplemented by borrowing

  2. Next, they use that money to acquire a business

  3. After that, they “enhance the business’ value” by making changes like cutting unnecessary costs or improving its leadership

  4. And within five years of buying it, they try to sell the company at a higher price

But that final stage hasn’t been so easy, recently.

Rising interest rates have increased the cost of borrowing money, so anyone looking to raise money to buy businesses is holding off right now.

That’s impacting private equity firms' ability to find buyers — so they’re left holding a growing backlog of unsold companies.

How big of an issue is this?

According to the consultancy company Bain, there's a backlog of 28,000 companies, together valued at over $3 trillion (yes… trillion), still held by private equity firms worldwide.

PE firms aim to sell these companies within three to five years. But now, over 40% of these unsold entities are hitting the four-year mark.

Are things going to change any time soon?

While interest rates remain high, things will probably stay like this — and there’s no sign of interest rates changing.

This week, we’re going to get rate decisions from the US Federal Reserve (on Wednesday) and the Bank of England on Thursday.

Both are expected to leave the high interest rates as they are.

Why should private equity firms care?

Once these firms make a sale of a company, they’ll give a proportion of that money to their investors.

If they’re not selling any companies, their investors will get a nervous about getting a return on their money!

Buying time: As PE firms are put under pressure to generate some funds, some have resorted to borrowing money to bridge the gap.

It’s an unsustainable solution because:

  1. the companies they hold were bought with debt,

  2. and then they’re using these debt-filled companies as security to borrow more money.

It’s a bit like buying your house with a mortgage and borrowing against the value of the house even though there’s already borrowing on it. 😬

IPOs instead of sales: Another options for PE firms to cash out is to take the companies public instead of trying to sell them. The Initial Public Offering (IPO) route is starting to heat up again — European companies raised over £2bn in IPOs since January, more than double the amount from the same time last year. So we’ll probably see more PE-owned businesses go down this route to turn their assets into cash.

Why should law firms care?

Corporate law firms make more money when there are deals taking place — and PE transactions are a major source of revenue for them.

Since interest rates started rising in 2022, there’s been a slump in deals. And news stories like this one — about struggling PE firms — aren’t a good sign.

High interest rates → expensive acquisitions → fewer deals → less money for law firms.

Although we’re in a bad transactions market, some law firms are still betting on PE coming back strong.

Miko Bradford, from the recruitment company Bluepeak said: “You are seeing firms invest in private equity… with a particular focus on the top end. Firms know that those private capital providers are amongst the most innovative, doing the biggest, most complicated, sophisticated transactions that continue irrespective of market conditions.”

And if you’ve looked at the legal press, you’ll have seen this in the recent PE hiring frenzy (mostly from US law firms) — these are just some of the headlines from the last couple of months! 👇

Credit: The Lawyer

Law firms are hiring (very expensive) PE partners because in private equity ”client relationships are very personal and so clients are very likely to follow the partner”, according to Siobhán Lewington, from the recruitment company Fox Rodney.

So, despite all the news being bad and interest rates being unlikely to change, some firms are looking to get a head start on PE deals when they return.


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