Editor's note: Private-equity firms are under pressure today. But according to Joel Litman – founder of our corporate affiliate Altimetry – what comes next could present unique buying opportunities for those who know how to take advantage. In this article, adapted from a recent issue of the free Altimetry Daily Authority e-letter, Joel explains why this is a setup for fire-sale prices...
Private-equity ("PE") firms are in a panic...
And it's not because they can't keep piling up debt just to reward their investors with dividends.
It's because their business model is breaking.
Normally, these firms raise money from investors and put that cash into "funds." Those funds then go out and buy companies with debt... and spend five to seven years fixing their businesses up.
The PE firm then sells those companies for a higher price – either to the public markets, to a larger industry player, or even to another PE firm.
Of course, PE investors know they can't expect a payday overnight. The fundraising process alone can take up to a few years... And again, it can take up to seven years to improve these debt-laden companies' businesses.
When PE firms eventually do that, and then sell those businesses for a profit, that's when they return cash back to investors... who then happily reinvest it in a new fund.
It's a pretty simple business model. But it's completely falling apart today.
As I'll explain, PE firms have their backs against the wall. They're being squeezed by their investors and potential buyers. And sooner or later, they'll have to accept the inevitable.
Investors in PE funds are getting restless...
Worldwide, PE firms are sitting on a record 28,000 unsold companies. That's worth more than $3 trillion combined.
They simply can't find buyers for their assets, which means it's going to take longer for investors to get their money back.
Ultimately, there's just far less demand for these kinds of companies...
PE-backed IPOs have flopped in recent months. And other companies – such as larger industry players and serial acquirers – aren't willing to buy. Most of them need debt financing to close the deals. And with interest rates still so high, they're waiting for a better price... which they may get.
The combined value of PE-backed companies that were sold either privately or publicly in 2023 fell 44% from the year prior – reaching the lowest level in a decade.
One of the most popular moves of the past several years has been to sell a portfolio company to another PE fund. Yet, even that approach has failed to work. The value of companies sold to other PE firms fell 47% last year due to differing opinions about how much the assets were worth.
And keep in mind, these PE-backed companies aren't in the early stages of their lives... More than 40% of the companies waiting to be sold are at least four years old. That means PE firms should be selling soon.
But nobody's budging. And everybody is getting antsy...
Investors want their money back. They won't put any more cash to work unless they get paid back for older funds.
PE firms want to unload their companies. That's the only way they can start fundraising for the next round of investment vehicles... and pay their investors back for previous ones.
Potential buyers want better deals – especially if they're going to be buying companies that still have debt.
Something has got to give. And in all likelihood, the PE firms will be the ones to crack.
That means PE firms will have to start selling their holdings at discounts... perhaps even for losses.
This will hurt in the short term. It's going to cause investors to panic. And it might even put some PE firms out of business. However, it'll also help break up the current logjam.
And savvy investors on the other side of those transactions are bound to get some great bargains.
Regards,
Joel Litman
Editor's note: A historic anomaly is unfolding in the market right now. And it doesn't have anything to do with the "Magnificent Seven" tech stocks... or the presidential election.
One group of American stocks is trading at the cheapest prices we've seen in 20 years... But these companies won't stay beaten down for long. Last week, Joel and Stansberry Research founder Porter Stansberry sat down to discuss this rare market event... and why it has already sent specific stocks soaring as high as 90%, 99%, and 170%. Click here to learn about this fast-moving story.
Further Reading
PE firms might soon sell their holdings at bargain prices. But many of the firms themselves have become "zombies." And PE-backed IPOs are especially dangerous today... Learn more here.
A lot of folks panic in times of crisis. But that's exactly when you want to hang on to your winners – and find new beaten-down opportunities. Specifically, you want the kinds of companies that will reward you year after year, no matter what... Read more here.
HIGHS AND LOWS
NEW HIGHS OF NOTE LAST WEEK
JPMorgan Chase (JPM)... financial giant
Bank of America (BAC)... financial giant
Citigroup (C)... financial giant
Discover Financial Services (DFS)... digital bank
Travelers (TRV)... insurance
Cigna (CI)... health insurance
Stryker (SYK)... medical devices
Micron Technology (MU)... semiconductors
Amazon (AMZN)... online-retail king
Disney (DIS)... streaming and entertainment
DoorDash (DASH)... food-delivery service
Procter & Gamble (PG)... consumer goods
Colgate-Palmolive (CL)... household goods
Target (TGT)... big-box retailer
D.R. Horton (DHI)... homebuilder
Lennar (LEN)... homebuilder
Cintas (CTAS)... uniforms
General Motors (GM)... automaker
General Electric (GE)... manufacturing
FedEx (FDX)... package delivery
Waste Management (WM)... trash and recycling
Motorola Solutions (MSI)... telecom
ConocoPhillips (COP)... oil and gas
NEW LOWS OF NOTE LAST WEEK
Biogen (BIIB)... biotechnology
VeriSign (VRSN)... domain-name provider
Iridium Communications (IRDM)... mobile-satellite service
