Private Equity Is in Middle of a Shakeout, Says Bravo

Bloomberg

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00:00As you mentioned, when we had spoken earlier this summer, you were really out front with saying

00:03private equity has lost its way. Where do we stand in that cycle now? Every now and then,

00:08you hear news report of a company or a fund that tried to fundraise. It doesn't do so as

00:13successfully as it has in the past. Where are we out in the shakeout? Are we about to see some real

00:18visible pain between the haves and have-nots? We are in the middle of the shakeout.

00:23It's when you see the few funds that raise all this great amount of money, they have two things.

00:29They have great performance, and they have liquidity to their LPs. They have high DPIs.

00:36The investors in private equity, states, sovereign wealth funds, that's where most of the capital

00:42comes from, the big money, 80% of the money, their boards still believe in private equity.

00:49The 10-year performance beats everything, the 15-year performance, the 20-year performance.

00:54The challenge is they have an allocation usually to private equity of 15%. Some are growing a little

01:01bit from 13%, others may be decreasing depending on their portfolios. That investor base or that

01:08allocation is very stable, which is really nice for us and for the industry. But that allocation is

01:15stable because people get money back and they redeploy the money. If not, that allocation would grow on

01:22indefinitely. So when we meet with our own investors, we have a sheet for every one of

01:26them. And that's the one piece of paper we have is how much money they've given us, how much money

01:31we've given back, and therefore how much money maybe they have left to redeploy. Because also as a

01:36manager, they cannot be, or we would love to, 100% concentrated in Toma Bravo by continuing to give

01:42us capital. They need manager diversification. So the people that don't have liquidity and are having

01:49problems, they're just going to go away. And I've never seen that in the industry in 30 years.

01:56The best managers are going to get a lot more money. And we're seeing that also in the business.

02:00What does it look like for funds to just go away? Is it they kind of quietly wind down? Does more

02:07consolidation happen? Do you have some really high profile shakeouts? What exactly does that even look

02:12like? We're seeing a lot of funds wind down and close. We meet with, you know, we have most of,

02:18most of our, our partners are most of the states and most of the sovereign wealth funds. And I spend

02:25about 25 to 30% of my time with them to see how our performance matches up to our competitors,

02:31to see how they're doing, how else could we help them? Are we doing enough co-invest? We are so close to,

02:37to our partners and they are very open and they tell us we're really worried about these dormant

02:43or zombie funds because they've lost half their team. They've gone to do something else. And their

02:48senior people know that they'll wind down the portfolio and that there's no future, future

02:52fundraise. It is still private equity is still a bit of a momentum business. When you're returning a

02:58lot of money, your people have confidence to put money out. Investors have confidence to give you

03:03money. People are happier. Everybody that carries worth something to the team. People are getting

03:07promoted from within. The older generation didn't lose 10 years of opportunity. It's great. So you

03:13see that now and now that's accelerating because the added pressure is the S&P with the Magnificent

03:19Seven in the last five years has done great. It's hard to compete with those stocks. And yeah,

03:25that's where we are. So to be clear, the issue isn't just that exits aren't happening. It's that

03:29just straight up managers are underperforming, underperforming public markets.

03:32100%. Over the last five years, the average private equity firm and venture capital firm has

03:39underperformed the S&P 500. Now, the best of the best always crush it. They find a way. And we're

03:47talking about losing its way. And for, I mean, there's a lot of experience in this room. But for those of

03:53you that are younger in starting a firm or building a firm, private equity should be agnostic as to

04:02what the environment is. You're not buying a stock. You're buying a company. It's not what's happening

04:09to you. Well, you buy a stock and the stock price goes down and inflation goes up or this happens or

04:15there's a tariff war or trade. You can only sell the stock or keep it. But things are happening to you.

04:21When you own a company, there is so much you can do about it. You just have to adapt to the times.

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