Why Private Equity’s Playbook is Losing to Public Markets

Bloomberg Television

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Video Summary

Private equity, once a reliable path to outsized returns, faces a new reality as rising interest rates and market shifts make deals harder to finance and exit. For entrepreneurs like Dan Namorow, selling a business to private equity once seemed like a distant dream, promising a millionaire's payday.

However, the landscape is changing. The era of cheap capital that fueled high valuations and quick profits is over. Now, private equity firms must increasingly prove their value through operational improvements rather than just financial engineering. Investors are scrutinizing fees and demanding liquidity, while firms face a growing backlog of companies, forcing a fundamental shift towards demonstrating genuine operational value-add to secure future funding and deliver on promises.

Short Highlights

Private equity historically offered higher returns than public markets.
Rising interest rates increase financing costs and reduce the attractiveness of equities.
The market shift demands operational improvements over leverage and multiple expansion.
Investors seek more liquidity and scrutinize high fees.
The backlog of companies held by private equity has grown significantly.
Entrepreneurs face pressure to deliver operational value, not just financial gains.
The industry is polarizing, rewarding firms that adapt to the new environment.

Key Details

The Promise of Private Equity [0:00]

Private equity has long been a key investment tool, known for delivering superior returns compared to public markets.
For entrepreneurs like Dan Namorow, selling a business to private equity was an unexpected path to significant wealth.

"When I started my business having an end goal was not even a thought in my mind. I had no idea about business."

An Entrepreneur's Unexpected Windfall [0:31]

Dan Namorow built his electrical company without anticipating a private equity buyout.
He initially dismissed the idea of selling his business for millions within eight years.
The prospect of a significant payday, including a 12x EBITDA increase, seemed like a "joke" or a "scam" at first.

"If I was approached in year one by someone who said Dan you're going to sell this business in eight years for millions of dollars I would have simply laughed at them."

The Trade-Off of Control [0:55]

Despite the financial gains, Namorow experienced a significant loss of control over his business after the sale.
He emphasizes that owners must realistically assess their position post-acquisition.
The experience impacted both his personal sense of self and the "soul of the business."

"But I can say that no matter what an owner thinks is going to happen. They need to take a step back and look at the reality of things."

Shifting Market Dynamics [1:31]

The surge in private equity deals in 2021, fueled by stimulus, has slowed considerably since 2022.
Rising interest rates have made private equity less attractive, impacting both general and limited partners.
Higher rates increase the cost of debt financing for private equity deals, making it harder to achieve target returns.

"Yes in two ways. First any time interest rates go up the attraction of equities goes down because if you can invest in a fixed income security and get an interest rate of X and that's high enough relative to what you think you're going to get with the risk of the volatility and risk associated with equity securities you're going to migrate toward fixed income."

Performance Under Scrutiny [3:06]

While private equity historically outperformed public markets, this trend reversed around 2019.
The rise of big tech boosted public market returns, while higher acquisition prices in recent years have complicated exits.
Firms are now judged more on their ability to add operational value, rather than relying on leverage and market appreciation.

"The deals in 2020 and 21 they paid high prices then they got hit by interest rate increases. And those deals are not doing so well."