decade it sometimes seemed as if anyone could be a private-equity investor. Rising valuations for portfolio companies, and cheap financing with which to buy them, boosted returns and reeled in cash at an astonishing clip. Improving the efficiency of a portfolio firm, by contrast, contributed rather less to the industry’s returns. As acquisitions accelerated, more and more Americans came to be employed, indirectly, by the industry; today more than 10m toil for its portfolio firms.
Corporate carve-outs also have gilet-wearing types excited. Such deals, where large companies shed unloved assets, have fallen as a share of private-equity transactions since the global financial crisis of 2007-09. But given tough economic conditions, companies are increasingly looking to sell “non-core” assets in order to focus operations and bolster balance-sheets. Spin-offs announced by American firms surged by around a third in 2022, according to Goldman Sachs, a bank.
When mixed with a portfolio firm’s underlying business problems, high interest costs can be toxic. Consider Morrisons, a British supermarket bought by Clayton, Dubilier and Rice, an American investor. The grocer has lost market share to cheaper retailers, as inflation has stretched customer wallets. According to CreditSights, a research firm, the company’s interest bill will more than quadruple this year.
In this more restrained era, private-equity managers might have to ditch their habit of chasing the same targets. Over the past decade, around 40% of sales of portfolio firms were to another private-equity fund. But there are probably fewer operating improvements to be made to such firms, making them less alluring to buyers.