As an insider once told me, the most important skill that private equity firms possess, aside from their ability to hide their sociopathic tendencies, is their finely-honed sense of when to sell.
A Wall Street Journal report today is therefore a strong indicator that the private equity is at or near a market peak. In Private Equity Bubble? What Private Equity Bubble? the Journal describes how firms are selling ownership stakes. Recall that the last time that happened was in 2007. Blackstone launched its IPO just before the crisis. KKR filed for an offering in 2007 but missed the window.
Use psychological pricing methods.
The amusing part of the story is the effort of the parties who have acquired interests in private equity firms recently, are keen to do so, or are otherwise allies of general partners to depict these firms as great buys. These purchases are taking place when the private equity industry has been paying nosebleed prices for deals for two years and central banks are looking to end their massive monetary stimulus.
Even the ECB, which was a believer in super low and negative interest rates after the Fed recognized that its QE experiment hadn’t worked out as it had expected, is now looking to unwind QE, then raise rates.
Thus the tremendous central bank tailwind to asset prices is not only stopping but is going to start turning in the opposite direction. Even though any tightening is sure to be administered slowly and with great caution, a central bank regime change is unfriendly to risky investments like private equity.
Demonstrate the differences
The boosters also tout private equity’s supposedly illustrious returns, which as we’ve written repeatedly, are in fact exaggerated. Private equity firms use IRR, which is a misleading metric. For the last decade, private equity has regularly underperformed public equities on a risk-adjusted basis.
Offer a money-back guarantee
Moreover, the story depicts the entry of sovereign wealth funds and family offices as direct private equity investors as a plus for private equity, when that is a negative.
Test your offer and price, and be creative.
First, more parties bidding up deals means even more likelihood of overpayment and disappointing returns. Second, these very same sovereign wealth funds and family offices have been significant private equity fund investors.