Why Private Equity Is in Such a Funk
An industry that runs on debt is hoping better days — and more dealmaking — are ahead. Can lower interest rates set the stage for a comeback?
Illustration by Lucas Burtin
Private equity firms, once the rainmakers of Wall Street, have fallen on hard times. For decades, they raised bushels of cash, bought businesses, loaded them with debt, sold them at a profit and persuaded happy investors to do it all over again. PE, as the asset class is known, grew at breakneck speed, snapping up companies worldwide — from dry-cleaning businesses and pet care companies to private hospitals and school operators.
A combination of higher interest rates, inflation and macroeconomic uncertainty over the past two years abruptly ended the party. Debt, which fuels big buyouts, has gotten costlier, eating into the profits of companies that PE firms invest in and deterring would-be buyers of those assets. Buyout firms are sitting on a pile of assets they purchased during a giddier, lower-interest rate era — and can no longer cash out at the prices they hoped for. In addition to creating a glut of companies to be sold, the dealmaking slowdown has produced a rising cash pile lying dormant and a cohort of disgruntled investors waiting to get their money back.