Private equity faces ‘lost generation’ on higher interest rates

PRIVATE equity has to contend with a “lost generation” as interest rates remain higher for longer, according to Ontario Teachers’ Pension Plan chief strategy officer Jonathan Hausman.

“In the private equity world, we’re probably looking at a little bit of a lost generation of vintage,” Hausman said on Tuesday (Jun 11) at the US-Canada Summit in Toronto.

The buyout industry is facing the toughest environment since the 2008 financial crisis. Higher borrowing costs have reduced deals to a trickle, hampering fund managers’ ability to return money to investors such as pension plans, endowments and wealthy individuals.

“The private equity players don’t like to sell their companies” at a discount, Caisse de Depot et Placement du Quebec’s head of private equity, Martin Longchamps, said. “But those companies, since we haven’t had a recession, they have grown into those valuations.”

Longchamps said he expects a “significant uptick” in deals globally in the next six to 12 months. Limited partners “want their money back”, he said.

For now, buyout shops are adapting to the deal drought by using new techniques, such as carve-outs, continuation vehicles and profit-sharing with employees, said Hausman, who predicts large private equity firms will consolidate.

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“When there’s a greater amount of risk, generally speaking, this leads to a consolidation,” he said. “Things will get better, but it will be because people adapt – not because the conditions revert.” BLOOMBERG