Tag Archives: private-equity

03.19.25
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That Door’s Closed. What’s behind Door #2?

By: Russ Kamp, CEO, Ryan ALM, Inc.

I’ve mentioned often through posts on this blog that we as an industry tend to overwhelm good ideas by allocating ridiculous sums of money in the pursuit of the next great idea. Sure, the idea was terrific several years ago, but today…? We are currently witnessing the negative impact of such an occurrence in private equity. According to many recent reports, the ability to generate liquidity from PE funds is proving to be as challenging as it has ever been. There are only two ways to liquidate holdings in a private fund: 1) a private transaction with a company or another PE fund, and 2) an initial public offering (IPO).

It appears that neither option is readily available to the private equity advisor at this time. Public markets seem to have lost their luster, as there are more than 1,000 fewer companies today than just 10-years ago. Current valuations are also acting as an impediment to going public with portfolio companies. Couple this with the fact that the lack of transactions is limiting the liquidity available to engage in private transactions among PE firms.

Given this situation, one would think that perhaps PE firms and their investors would reduce the demand for product and allow for the natural digestion of the “excess” capital. But no, that does not seem to be the case. According to an article by Claire Ruckin (Bloomberg), private equity firms are “turning to cash-rich credit investors for money to pay dividends to themselves and their backers.” Furthermore, a few are “getting back as much as they first invested, if not more, in effect leaving them with little or no equity in some of their biggest companies.” So much for being equity funds!

According to Claire’s article, more than 20 businesses in the US and Europe have borrowed to make payouts to their owners, according to Bloomberg-compiled data. Ironically, these “dividend recap” deals are a boon to lenders (private creditors) who have lots of cash to deploy. Could this be indicative of another product area overwhelmed by pension cash flows? Private equity firms are happy to take those resources off the creditors hands to return capital to their investors, but is the stacking of additional debt on these companies a good strategy? What happens if the current administrations policies don’t result in growth and worse, lead us into recession? Will these deals prove to be a house of cards?

As we’ve mentioned just shy of 1 million times now, a pension plan’s primary objective should be to SECURE the promised benefits at a reasonable cost and with prudent risk. Do you think that allowing private equity firms, which are already expense investment vehicles, to stack additional debt on top of their equity investments is either a reasonable cost or fiduciarily prudent? Come on! What are we trying to do here?

Defined benefit plans are critically important for the American worker. Continuing to place bets on the success of a PE firm to identify “attractive” equity investments in an environment as challenging as this one and then allowing them to “double down” by adding layers of debt just to pretend that capital is being returned to the investor is just wrong. Let’s get back to pension basics when we used the plan’s specific liabilities to drive asset allocation decisions that centered around securing the promised benefits. You want to gamble – go to Atlantic City. DB pensions plans aren’t the place.

01.07.25
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Will You Do Nothing?

By: Russ Kamp, CEO, Ryan ALM, Inc.

I recently read an article by Cliff Asness of AQR fame, titled “2035: An Allocator Looks Back over the Last 10 Years”. It was written from the perspective that performance for world markets was poor and his “fund’s” performance abysmal during that 10-year timeframe. His take-away: we can always learn from our mistakes, but do we? He cited some examples of where he and his team might have made “mistakes”, including:

Public equity – “It turns out that investing in U.S. equities at a CAPE in the high 30s yet again turned out to be a disappointing exercise”.

Bonds – “Inflation proved inertial” running at 3-4% for the decade producing lower real returns relative to the long-term averages.

International equities – “After being left for dead by so many U.S. investors, the global stock market did better with non-U.S. stocks actually outperforming”.

Private equity – “It turned out that levered equities are still equities even if you only occasionally tell your investors their prices”. When everyone is engaged in pursuing the same kind of investment there is a cost.

Private credit – “The final blow was when it turned out that private credit, the new darling of 2025, was just akin to really high fee public credit” Have we learned nothing from our prior CDO debacle?

Crypto – “We had thought it quite silly that just leaving computers running for a really long time created something of value”. “But when Bitcoin hit $100k we realized that we missed out on the next BIG THING” (my emphasis) “Today, 10 after our first allocation and 9 years after we doubled up, Bitcoin is at about $10,000.”

Asness also commented on active management, liquid alts, and hedge funds. His conclusion was that “the only upside of tough times is we can learn from them. Here is to a better 2035-2045”

Fortunately, you reside in the year 2025, a year in which U.S. equities are incredibly expensive, U.S. inflation may not be tamed, U.S. bonds will likely underperform as interest rates rise, the incredible push into both private equity and credit will overwhelm future returns, and let’s not discuss cryptos, which I still don’t get. Question: Are you going to maintain the status quo, or will you act to reduce these risks NOW before you are writing your own 10 year look back on a devastating market environment that has set your fund back decades?

As we preach at Ryan ALM, Inc., the primary objective when managing a DB pension plan is to SECURE the promised benefits at a reasonable cost and with prudent risk. Continuing to invest today in many segments of our capital markets don’t meet the standard of low cost or of a prudent nature. Now is the time to act! It really doesn’t necessitate being a rocket scientist. Valuations matter, liquidity is critical, high costs erode returns, and no market outperforms always! Take risk off the table, buy time for the growth assets to wade through the next 10-years of choppy markets, and SECURE the promised benefits through a cash flow matching (CFM) strategy that ensures (barring defaults) that the promised benefits will be paid when due.

Thanks, Cliff, for an excellent article!

06.17.24
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Good Ideas Are Often Overwhelmed!

By: Russ Kamp, Managing Director, Ryan ALM, Inc.

We have a tendency in our industry to overwhelm good ideas with much too much money. Asset flows can be evil as they drive valuations up as too much money pursues to few good ideas. The “winner” in the bidding competition frequently (eventually) becomes the loser in the long run. I recently wrote about this phenomenon as it related to private credit. Well, we have a similar, if not more egregious example as it pertains to private equity. With more than $3.2 trillion tied up in aging, closely held companies at the end of 2023, according to Preqin data. 

I recently read a refreshingly honest post on LinkedIn.com about the current state of private equity. The comments referred to a discussion given by a “leading” voice within the industry who mentioned that the “types of PE returns it (our industry) enjoyed for many years, you know, up to 2022, you’re not going to see that until the pig moves through the python. And that is just the reality of where we are.” That is quite the image. It speaks to my point about too much money chasing too few good ideas. Pension America has pursued a return objective in lieu of one that stresses the securing of the pension promise. Striving for return has forced most participants to load up on gimmicky alternatives, including real estate, private credit, private equity and worst of all, hedge funds.

For the early adopters, returns above those produced by the public markets were achievable, but again, once someone has a decent idea we tend to jump on that bandwagon until the horse can’t pull the cart any longer. What happens next is usually not pretty. This leading voice also mentioned that “fewer realizations and lower returns” were on the horizon until the proverbial pig was digested. Unfortunately, PE firms are holding onto these aging companies and they will need to be refinanced at much higher interest rates which will further reduce expected returns.

In other news, Heather Gillers, WSJ, reported that the honeymoon may be over between pension America and private equity managers. The promise of high returns may not be realized after all. According to Ms. Gillers, payouts from these expensive offerings have all but dried up. As a result, many pension funds are unloading their investments at significant discounts through secondary markets. According to this article, large public pension systems have migrated roughly 14% of the plan’s AUM into PE. What once looked like an investment that could produce a premium return is struggling to match returns of the S&P 500.

Worse, about 50% of the private equity investors have assets tied up in “Zombie funds”, which hadn’t paid out on the expected timeframe. Needing liquidity (should have invested in a cash flow matching strategy), these pension funds are getting an average of about 85% of the value of assets that were assigned just three to six months prior. According to Jefferies Financial Group about $60 billion was transacted in secondhand sales by PE investors last year.

Despite the lack of liquidity and the idea that too much money has been chasing too few good ideas, the “honest’ assessment by our industry “leading voice” stopped at their doorstep. You see, his firm believes that by 2026 (beginning or end of year???) their alternative assets under management will rocket from $651 billion to $1 trillion. Wow! Now how will that pig pass through the python? Are we to believe that growth of that magnitude will not negatively impact that firm or our industry? I guess that the news to date hasn’t been sufficiently ugly to stop this rampage into PE. I’ve seen this movie before. Spoiler alert – the train barrels forward until it goes over a cliff where the tracks used to be. I’d suggest getting off the next stop.