Private Equity Investors Favor Specialty Shops Over Supermarkets
Private equity investors in the United States are showing a preference for specialty shops over supermarkets, according to recent fundraising data. Clayton, Dubilier & Rice (CD&R) and CVC Capital Partners have successfully raised more capital for their flagship buyout funds compared to their peers Blackstone and Apollo Global Management, who oversee a broader range of investment vehicles. This trend challenges the traditional diversified business model commonly adopted by publicly listed alternative asset managers.
In the first nine months of 2023, US private equity funds raised $240 billion, which is a 13% decrease from the previous year, as reported by research firm PitchBook. Consequently, the latest flagship buyout funds are of smaller sizes compared to their predecessors. Blackstone’s Blackstone Capital Partners IX is expected to have a total size in the low-20s billion-dollar range, compared to the $26 billion committed to its eighth fund. Apollo’s Fund X closed at around $20 billion, which is one-fifth less than the $25 billion raised for Fund IX.
However, two smaller and more narrowly focused investors have defied this fundraising slump. CD&R raised $26 billion for its 12th-generation private equity fund in August, while CVC managed to raise a staggering $29 billion in July, making it the largest buyout fund ever raised, according to PitchBook. In contrast, the latest efforts from Blackstone and Apollo did not make it into the top five.
Investors, also known as limited partners, back specific funds for various reasons, making it challenging to determine the factors behind these discrepancies in fundraising success. Notably, the winners of the 2023 fundraising cycle, CD&R and CVC, are rooted in traditional buyouts. Approximately 70% of CVC’s assets under management come from buying and selling whole companies, while CD&R solely focuses on this business.
For Apollo and Blackstone, private equity has become less significant. Apollo’s CEO, Marc Rowan, has been transforming the firm into more of a credit and insurance investor, while Blackstone’s largest asset class is real estate. These firms offer a wide range of investment strategies and services, unlike the more focused buyout shops.
Various theories attempt to explain why this change in preference is occurring. One theory suggests that limited partners are starting to mistrust the motives behind diversification, claiming that firms like Blackstone and Apollo care more about accumulating cash to oversee a variety of assets and keep their stock prices elevated. Savvier investors are now turning to smaller buyout shops whose bosses are primarily paid out of fund profit, giving them a stronger incentive to achieve better performance.
However, this theory may not entirely hold up. CVC has been considering an initial public offering for at least a year, and limited partners have not penalized the firm over the prospect of senior executives being paid in listed stock. Additionally, the claim that dealmakers at Blackstone and Apollo are disinterested in creating alpha is debunked by the fact that fund managers earn most of their fortunes from profit known as carried interest. They have a vested interest in achieving better returns, just like limited partners.
Another explanation, suggested by consultants who advise limited partners, is that private equity supermarkets may be cannibalizing themselves. For instance, since raising a record-breaking buyout fund in 2019, Blackstone has raised funds for different investment strategies, such as a longer-life private equity fund and investment pools for Asia and younger firms. It is plausible that some of the money that would have gone into Blackstone’s flagship fund is now being directed towards these other funds. On the other hand, CD&R avoids this risk by focusing on one main fund at a time, while CVC has a more blended approach, targeting various regions and investment horizons.
A third possibility that may concern Schwarzman and Rowan is that the flagship funds of superstores like Blackstone and Apollo do not always deliver leading returns. Blackstone’s sixth and seventh flagship buyout funds had generated a 13% internal rate of return (IRR) as of Sept. 30, which is better than the 11% earned by US pension funds on their private equity investments between 2000 and 2021. However, it falls short of the approximately 15% net IRR that buyout dealmakers typically target. Apollo’s performance has been more inconsistent, with its eighth fund having a disappointing 10% net IRR, while the 2018 Fund IX is at 24%, on paper.
In contrast, limited partners may view CVC and CD&R as consistently outperforming their peers. According to the Calpers private-equity performance database, CVC’s 2014 and 2018 vintages generated respective net IRRs of 18% and 23% as of December 2022. CD&R’s 2018 fund had a stellar 39% net IRR. These results indicate a lack of clear and consistent advantages from diversification across different sectors. Until the superstores can prove otherwise, they risk losing
More detail via Reuters here… ( Image via Reuters )