A slowdown in mergers and acquisitions across industries that started in 2022 has made private equity less profitable and reduced the amount of money firms return to investors, the Wall Street Journal reported June 30.
“Beyond hitting profits, the slump has delayed the timeline for private equity firms to sell investments, adding to the pile of so-called tail-end funds, those a decade or more old,” reported Chris Cumming.
He noted that the most recent data shows firms had $668 billion of privateequity assets globally stuck in tail-end funds as of 2023, 19% higher than the previous year, according to a report from Treo Asset Management.
Finbarr O’Connor, Treo’s chief investment officer and founding partner, said the trend continues and he is forecasting tail-end assets to hit $1 trillion in coming years. The Treo report shows that a third of assets held 8 years or more are worth less than the initial capital investment.
Fund limited partners are likely paying $3-13 billion a year in management fees on the $668 billion in tail-end assets, based on the typical fee range of 0.5-2% on net asset value, WSJ reported.
“The report underscores some of the cascading effects of private equity’s exit drought. In the U.S., firms’ combined exit volume in the nearly 2.5 years since the start of 2023 remains below the 2021 sum alone, according to research provider PitchBook Data. By 2023, U.S. firms’ median investment hold time had climbed to a record high of 7 years, and it remains nearly the historic peak,” Cumming reported.
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