We’ve written off and on over the years about the code of omerta surrounding private equity investing. The fund managers, aka “general partners” had managed to so cow the investors, aka “limited partners” as to how only the privileged were admitted to the special club of fund investors, that they bought into an inversion of the normal rules in money-land: that the party with the gold, here the limited partners, makes the rules (or at least has a lot of say). Not only did these investors accept non-negotiable agreements1 with egregiously one-sided terms, but they also accepted not known how much in fees and expenses they were being charged and not having independent valuations (which is considered to be fundamental for every other type of investment made by fiduciaries). And they also agreed to treating the contracts as trade secrets, when there was nothing “trade secret” about them, and refrained from saying bad things about particular general partners or the industry generally, lest they no longer be afforded the opportunity to invest.
But the cognitive capture and the code of omerta are finally cracking. As the long-term slide in private equity returns has accelerated, and the industry has (not surprisingly) resorted to chicanery to try to keep milking investors, some big players are now willing to burn their bridges and call out industry misconduct in blunt terms. The example is a Financial Times front page story, Private equity’s best days are over, says Egyptian billionaire Nassef Sawiris, where the headline is tame compared to Sawiris’ criticisms.
But before turning to Sawiris’ critique, some backstory as to why it matters.
The reason to care about private equity is its outsized power and the damage it has done and is set to continue to inflict, not just upon employees and customers of private-equity owned companies, but as we’ll see, increasingly upon its investors. That includes public pension funds, who have accounted for an estimated 30% to 35% of total private equity commitments. Keep in mind that many of these public pension funds, such as CalPERS and the Kentucky Public Pensions Authority, have government guarantees of pension obligations, meaning taxpayers are on the hook if fund investment performance falls short.
As for their raw power, consider: private equity has for decades been the largest source of fees to Wall Street and top white shoe law firms. Contacts inform me that private equity has also provided more than half the professional fees to McKinsey, Bain and BCG since the early 2000s. In its pre-crisis IPO filing, KKR stated that was the fifth biggest employer in the US via the companies it owned.
The private equity fund managers are also unduly influential via succeeding in targeting niches (which may be geographic and thus don’t show up in usual antitrust surveys) where they can achieve pricing power. One is hospital billing, where two private equity owned companies, TeamHealth (Blackstone) and Envision (KKR) are singularly responsible for the big uptick in “surprise billing” abuses.
One might wonder why it has taken investors so long to escape private equity cult programming. The industry, in its very early years as “leveraged buyouts” in the 1980s, earned spectacular returns. Finding overdiversified conglomerates and selling them for more than the value of their parts was easy; the hard part was winning the takeover fight, particularly since Wall Street was not keen about siding against big corporations, who were lucrative clients. A LBO debt crisis (masked by the much bigger S&L crisis) of the early 1990s led to a fundraising drought, which meant that those who were able to buy corporations had little competition and generally got very good bargains. So a glory period of vintage 1995 to 1999 deals ensued, and private equity biz has been running on brand fumes for quite a while since then.
It’s not as if performance decayed quickly. But in the early 2000s, the money going into private equity rose markedly, the result of Greenspan in the dot-bomb era forcing negative real yields for an unheard of 9 quarters, which led investors into all sorts of reckless reaching for returns (like the subprime and asset-backed CDO bubbles). Historically, private equity was expected to deliver 300 basis points over stock indexes in returns to compensate for its higher risks (leverage and illiquidity). Mind you, no corrections were made for known problems, like private equity firms not reducing valuations sufficiently in bear equity markets (when by all logic, leveraged equity should be worth less than companies with lower borrowing levels) or adjusting for private equity reporting returns on average a quarter later than for listed stocks. The latter created an illusion of lower correlation with equities, which is valuable from a risk-reduction perspective. Recent papers that have corrected the timing of reporting have found, natch, a high level of correlation between public and private equity returns.
To shorten a very long story, Oxford Business School professor Ludovic Phalippou ascertained that private equity stopped outperforming public stocks in 2006. That means it should have been shunned as an investments, since it was no longer producing enough to compensate for its additional risks. To the extent private equity was delivering outsized total performance, the excess was being scraped off by the general partners in fees and expenses. Yet investors, particularly in the post-financial-crisis ZIRP era were desperate for additional returns, held fast to private equity hopium. They justified the flagging results with gimmicks like lowering the required risk premium from 300 basis points to 150, and switching the underlying equity benchmarks to be more flattering.
The chickens have come home to roost as private equity, as levered equity, has fared poorly in a higher (and not even all that high!) interest rate environment on top of its pushing-two-decades of widely unacknowledged underperformance. And unless Trump unexpectedly makes a big change in his economic course, private equity is set to suffer even more in a stagflationary environment (or worse, a flat out depression).
A collection of recent Financial Times headlines should give an idea of the sorry conditions in the industy:
Private equity’s bind should prompt an investor rethink
3 days ago — Private equity’s bind should prompt an investor rethink. Returns are likely to be lower in a world of weaker growth, higher interest rates …Private equity goes ‘risk off’ as it pauses dealmaking
Apr 15, 2025 — Donald Trump’s tariffs are forcing private equity groups to pause their dealmaking and focus on managing their existing portfolio companies, …Big investors look to sell out of private equity after market rout
Apr 6, 2025 — The race to find liquidity signals that investors in private equity funds increasingly expect to receive few cash profits from their holdings …Hedge funds > private equity
4 days ago — After all, whenever private equity buys and sell companies, takes them public or issues bonds and loans to finance them it generates hefty fees …Private equity industry shrinks for the first time in decades
Mar 4, 2025 BE — Private equity fundraising dropped 23 per cent in 2024, with the industry drawing in $401bn in new assets — the weakest tally since 2020.Pensions dim on US private equity
Apr 14, 2025 — CPPIB’s trepidation over investing in the US, in particular, is a huge blow to the private equity sector. The fund had close to $50bn of …Can private equity meet public responsibilities? – FT Forums
To say that opinions on private equity’s sustainability record are divided would be a wild understatement. When we polled FT Moral Money readers, respondents …
And no, I did not omit any cheery search results.
A good one-stop shopping account of why once-loyal private equity investors are trapped in dud deals came in Big investors look to sell out of private equity after market rout. Keep in mind that CalPERS a few years ago acknowledged that private equity would go from being a cash flow positive investment strategy (CalPERS could expect to get more in redemptions than it put in in a typical year) to cash flow negative. Why CalPERS insisted on increasing its private equity allocation in the face of that knowledge is beyond me. Pensions do not pay out beneficiaries based on paper returns. They pay them out of cash on hand.
The pink paper explained that the cash bind has only gotten worse:
Large institutional investors are studying options to shed stakes in illiquid private equity funds after the rout in global financial markets pummelled their portfolios, according to top private capital advisers.
The calls by pensions and endowments seeking ways to exit their investments, probably at discounts to their stated value, are a bad sign for the $4tn buyout industry. Industry groups such as Blackstone, KKR and Carlyle all saw their stocks plunge between 15 per cent and more than 20 per cent on Thursday and Friday.
The race to find liquidity signals that investors in private equity funds increasingly expect to receive few cash profits from their holdings this year and may face liquidity pressures that cause them to further retrench from making new investments. Last year, the private equity industry’s assets dropped for the first time in decades, according to Bain & Co, as fundraising plunged 23 per cent from 2023.
Executives had expected that a revival of dealmaking and initial public offerings under US President Donald Trump’s administration would help firms return profits to their investors, bolstering a spurt of new investment activity. But the opposite has happened, leaving the private equity industry in one of its most vulnerable states ever….
“The amount of calls I’ve received from limited partners seeking liquidity in the past few days is the most since the first days of Covid,” said Matthew Swain, head of Direct Placements and Secondaries at Houlihan Lokey. “People were banking on IPOs to meet their liquidity needs and now need to raise cash just to meet capital calls.”
The “meeting capital calls” point is more pernicious than it seems. Those demands are coming from the very same private equity funds that are not selling investee companies on anything like the usual timetable. But most institutional investors have made commitments to current “flagship” (as in major) funds by big players. If those commitments have not been fully deployed, the general partner can make a capital call to make a new company buy and the fund investors have 5 to 10 days to get the money in. If they fail, their entire investment in that fund can be seized and allocated to the other investors in the fund.
Now finally, to the pointed takedown by billionaire Nassef Sawiris, as told to the Financial Times:
Sawiris, who has invested parts of his fortune in funds at multiple buyout firms, said he and others who back private equity funds were frustrated with the lack of distributions in recent years. Firms have struggled to exit investments amid a post-pandemic slowdown in dealmaking and initial public offerings….
“[Investors] are so frustrated. They are telling them [buyout firms]: ‘I haven’t seen any returns, you haven’t returned any cash to me in the last five, six years’.”
Sawiris took particular aim at the use of “continuation funds” to recycle capital — a tactic whereby private equity groups, instead of selling an asset to another owner or publicly listing it, move the asset into a new fund where they still maintain control.
“Continuation funds is the biggest scam ever because you say ‘I cannot sell the business, I’m going to lever it again’,” Sawiris said.
Continuation vehicles have grown increasingly popular in recent years, surging about 50 per cent to hit a record $76bn last year, according to a report from investment bank Houlihan Lokey….
He also criticised private equity managers’ priorities, saying they were far more focused on raising capital for their investment vehicles than their portfolio companies’ operational performance.
“They’re spending 90 per cent of their time fundraising and 10 per cent managing the businesses,” he said. “They attend board meetings, have a board dinner and there’s a reason why they didn’t execute the plan.”
Tellingly, Sawiris was breaking up his his Dutch-traded chemicals and fertiliser conglomerate OCI. He was lucky with many of his exits and returned a lot of cash to shareholders. He was considering using the remaining shell company with some cash retained to make new investments. He continued:
He said he was approached about buying dozens of companies…
Many of them were owned by private equity groups hoping for an exit, Sawiris said, adding that he did not find a single one of them to be an attractive target for a deal.
“A year ago we looked at 70 different companies that would have wanted to be merged with OCI because they were levered, and get a listing and all that . . . all private equity that can’t get an exit,” he said. “We said ‘like, why are we are there to solve somebody else’s problem’?”
So get this: not one had a company it could offer to a known-to-be sophisticated buyer on terms that made any sense. That suggests that any presentable and decently priced has long been sold, and what is left are dogs and zombies (companies that might be OK but are overburdened with debt, and the private equity manager won’t adjust his asking price to reflect that).
That suggests there’s no reason to expect the fundamentals to improve, even if Trump were to have a Damascene conversion tomorrow and drop his tariff demands. Yet wrong-way CalPERS decided in 2018 to increase its private equity allocation from 8% to 13% by 2021, and then in 2022 to boost the commitment from 13% to 17%. It has nearly met the 17% target. That “success” looks to be adding to private equity indigestion.
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1 Only a few terms at the margin are subject to ritualistic negotiation. Among other things, the limited partnership agreements contain astonishing indemnification language, including in the case of Bain deals, indemnifying the general partner for criminal conduct.
Many thanks Yves. The tide is definitely going out when the search for yield becomes the search for liquidity.
The FT is a most interesting paper. It’s a real fish wrap on Ukraine where one has to have a PhD in Prevarication in order to scribble. However, they are most illuminating when dissecting the shenanigans of PE and Hedge Funds.
Well, the “pernicious” bit is interesting. Here is a case where “…Yale has just over $8bn of unfunded capital commitments to private equity funds outstanding at the end of 2024.” So, unless they get the cash up to the managing partners the rest of their investment in “the fund” may be liquidated…at the very time that the university itself needs cash. Ouch.
Coffee on the keyboard with the ‘dogs and zombies’ bomb.
Oh, funny!
Why CalPERS insisted on increasing its private equity allocation in the face of that knowledge is beyond me.
It’s quite simple, really. Since the LBO days of Milken and Drexel, Private Equity has been a lavish donor to politicians. CalPERS is a political entity — the majority of its board are Democrat hacks and appointees and the “labor” minority are even more captive to Democrat fundraising needs than the hacks are.
Former Governor Jerry Brown said it best as he left office for the final time: Politics is a difficult business. You need to raise massive sums of money from people who all want something and if you give it to them directly you’ll go to jail. But if you don’t give it to them in some form, you won’t be elected to the next office. So you square that circle.
The graft comes out of fees so the inability to exit investments has little impact on its flow. However, the board members are all so closeted that they can’t bring themselves to even conceive of how badly the “skim” has gone out of control. Instead they secretly pray that the beneficiaries of their largesse will bail them out when the music stops. Fat chance…
As a member of a state (not CalPers) retirement program, I see first-hand how CalPers will manage their reduced “cash on hand”. Since CalPers also offers retirees health benefits as part of its pension program, it will shift costs/benefits onto the retirees; reduced coverage and greater ‘time costs’ for dental/medical services.
When CalPers eventually opens the ‘sovereign state’ funding source it will access a huge tax base of 40 million citizens to supply payments to 2 million retirees. Most won’t notice the gouge.
Since swearing fealty to this Commentariat and the principles of the Skunk Party many(!) moons ago, I have always jumped at your CALPERS stories. At first it seemed curious that a NYC -centric financial blogger would take such an interest in a pension fund way out on the ‘left coast’ but it soon became apparent that it was the degree of fiduciary malfeasance (a “gift” that keeps giving, no less!) and the size of the fund’s piggy bank (being in Cali for the last 10 years, I can safely say that the local term would be, “It’s hella phat”) Truth, indeed, is stranger (and scarier!!) than fiction. I’m fond of saying, “I’ll be a New Yorker ‘till the day I die, but it’s hard to beat California sunshine!” Still not enough sunlight to disinfect this fustercluck though ;^\. My deepest condolences to the Calif. Public Employees – but they can take much encouragement that Yves and co. are on the case – and pro bono to boot!
Illigitimi non carborundum!
CalPERS has long been important as the biggest US public pension fund and for the two decades after its glory years in the mid-1990s, when it was an activist successfully targeting poor corporate governance, a leader among institutional investors (CalPERS shamefully explicitly renounced that role under CEO Marcie Frost). Its doing (performance, policy changes) are regularly prominent stories in the financial press. Our very first post was about CalPERS: https://www.nakedcapitalism.com/2006/12/fools-and-their-money-hedge-fund.html
CalPERS has been of particular interest with respect to private equity since it was required in the settlement of Public Records Act litigation to disclose the performance of its private equity holdings. The CalPERS portfolio is so large that that makes it a way to monitor WTF is up in private equity. CalPERS additionally, due to strong public disclosure requirements in CA (the Bagely-Keene Open Meeting Act plus the afore-mentioned Public Records Act) conducts its business in a pretty public manner, which again has proven instructive with respect to private equity.
“ Contacts inform me that private equity has also provided more than half the professional fees to McKinsey, Bain and BCG since the early 2000s.”
This may be an exaggeration. My own bottom up estimate from twenty five years in the industry up to 2024 (including as a partner at an MBB plus another smaller firm) would have been 35-40% in developed markets. But, it is a quibble. We are still talking about multi millions in fees and many well heeled careers! So your contacts are at least directionally right and even the internal data on this is often super opaque and “gamed”.
“ They’re spending 90 per cent of their time fundraising and 10 per cent managing the businesses,” he said. “They attend board meetings, have a board dinner and there’s a reason why they didn’t execute the plan.”
This is true of some (usually smaller) funds. However, the large ones typically have set up substantial teams to “support” portfolios operationally. The precise set ups vary but at some PEs the approach is highly mechanistic and intrusive. These operating “partners” intervene directly with chief commercial officers, chief procurement officers etc. and lower into the hierarchy. A typical intervention, of course, is to recommend a consulting project! At the extreme, these roles second guess management. It is rare for management teams to be overly happy with all this. The whole principal agent issue between portfolio company management and the PE firm is always an “interesting” one. It is true though that the deal teams not the operational teams in the PEs call the shots and that is consistent with the comment.
MBB?
Remember that part of why the PE firms hire consulting firms is for them to sell out the intel they got from other clients (the head of one prominent PE firm was explicit with me on that issue) as well as brand name. Both of those would argue for engaging the top consulting firms over the next tier. The person who gave me that intel is in a position to know explicitly re McKinsey, so I would not be so dismissive.
MBB = slang for those three firms. I was a partner at one of them but better not to say which. The other firm I was at claims common parentage with McKinsey by the way and is quite venerable!
Am not dismissive of your contact either. But “over half” feels high from what I have seen when one factors in the mega growth of public sector work in that period too. It may be right but am just sharing a different insider perspective as someone who has sold Due Diligences and Asset Improvement work into the sector, although it was never my prime focus.
My experience of PEs as a seller since around 2007 up to 2024 is that they are (increasingly) sophisticated in how they buy. You do come across PEs that only use (for example) Bain or LEK but these tend to be smaller. Typically PEs source the right firm for the precise job they need. Due Diligence work tends to flow based on specific “asset knowledge” which is consistent with your comment and would mathematically favour larger firms because they have more clients.
But my experience in Asset Improvement work (the area that usually accrues the highest fees) is that the approach is often very targeted. This is more so than corporates or public sector which are swayed more by the brand and the related internal need to get the right stamp of approval. Many boutiques (eg Efficio, Simon-Kucher) are very much part of the Play Book that the biggest PEs deploy (for sourcing, pricing respectively). I did not work for either of those firms, by the way. In fact, for these firms I would very easily believe that over half the revenue comes from PE work and would even push the estimate much higher.
What we can all agree (and in this your contact is right) is that a significant chunk of fees and careers are dependent on the sector. The precise percentage is a little academic and very often the firms do not even know for sure themselves owing to internal gaming of the management information. So a shake out would have very clear knock on effects.
Speaking of billionaires, Hank turned 100 a couple of days ago. Still goes to the office everyday.
Hank Greenberg, the former chairman and CEO of American International Group (AIG), first traveled to China in 1975. At the time, China was largely closed to foreign businesses and deeply impoverished, but Greenberg saw the potential for growth. He believed that eventually, China could not remain isolated from the global economy. His vision aligned with Deng Xiaoping’s reforms that began to unfold in the late 1970s, which aimed to transition China from a closed economy to a market-oriented one
As part of the pressure from institutions to get out of their PE investments, PE managers are looking to unload these assets on the ‘retail’ investor. Having taken the early, larger, and generally more reliable returns, the asset will now be offloaded to the less sophisticated investor, along with the higher likelihood of capital loss. The FT recently reported on 2 firms, KKR and Capital Group, starting up new funds that will mix traditional stocks and bonds with unlisted (e.g., private equity) assets. These will no doubt be offered as a way to ‘beat the market indexes’, and, while it’s possible they will, the worst will have some unbelievable junk in them, cleverly masked by the ‘regular’ assets.