📰 Are Private Equity's Good Days Gone?

Estimated read time: 4 minutes

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Welcome back to another issue of Finance Focus.

In the fast-paced world of private equity, Blackstone's recent earnings from the sale of Refinitiv (a financial market data provider) stands out as a masterclass in strategic investment and timely exits.

They acquired a 55% stake in Refinitiv from Thomson Reuters in 2018 and orchestrated a series of strategic moves, which has lead them to reap nearly $12 billion in gains. This impressive feat underscores Blackstone’s ability in navigating complex financial landscapes, even as the broader private equity industry faces challenges due to rising interest rates (private equity buyouts often use a lot of leverage/debt and so rising interest rates result in borrowing becoming more expensive) and stagnant IPO markets (private equity firms make huge profits from companies going public and a slow down in IPOs means less exits to profit from).

As private equity firms grapple with prolonged investment timelines and the challenge of finding profitable exits, Blackstone's approach to Refinitiv offers valuable lessons.

As we delve into the details of Blackstone's remarkable journey with Refinitiv, we also explore the implications for the future of private equity.

What strategies will other firms adopt to navigate these turbulent times? How will the industry adapt to the new economic realities?

Here’s the article. Scroll down to read my key takeaways and thoughts on the topic.

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Is The Era of The Mega Private Equity Deal Over?

TL;DR: Blackstone recently sold the last of its investment in Refinitiv, a financial data business acquired from Thomson Reuters in 2018. This sale marks one of Blackstone’s most successful deals, nearly tripling its equity investment and gaining almost $12 billion.

This rapid exit (6 years for acquisition to sale) contrasts with the current trend in private equity, where firms face prolonged investment timelines (10+ years in many cases) due to rising interest rates and decreased valuations. As a result, private equity firms are struggling with record stockpiles of ageing investments and fewer exit opportunities.

Key Takeaways:

1. Successful Exit: Blackstone exited its Refinitiv investment, achieving a near $12 billion gain, marking one of its most successful deals. This investment rivalled their gains from Hilton Worldwide ($14bn earned in profits), showcasing their strategic expertise in private equity.

2. Rapid Investment Turnaround: Blackstone managed to fully exit its investment in under six years, which is uncommon in the current private equity landscape. They orchestrated a strategic path to exit by first spinning off Refinitiv’s Tradeweb electronic trading business and later selling Refinitiv to the London Stock Exchange in 2021.

3. Market Challenges: Rising interest rates and reduced valuations have made it more difficult for private equity firms to find lucrative exit opportunities, extending their investment timelines significantly. This has naturally led to a cautious approach towards taking companies public due to fears of poor market performance and subsequent devaluation.

4. Record Stockpile of Investments: The private equity industry is dealing with over $3 trillion in ageing investments. Last year, the deficit between cash distributions to investors and the committed money for investments reached levels not seen since the 2008 financial crisis, indicating a significant challenge in managing these older investments. To add, the backlog of investments presents a logistical and financial challenge for private equity firms, exacerbated by the current economic climate.

5. Shift in Deal Strategies: Private equity firms are reconsidering large-scale deals and shifting their focus to smaller, more liquid investments to navigate the challenging exit environment. This shift includes considering “illiquidity discounts” and focusing on deals that present a broader array of potential buyers at exit, thereby reducing risk.

Personal Thoughts:

1. Exceptional Firm: This article highlights the exceptional strategic skill that Blackstone has in navigating the complexities of the private equity landscape, especially in an era where rapid and profitable exits have become increasingly rare. Their ability to triple their equity investment in under six years sets a high bar and serves as a benchmark for other firms.

2. Industry Challenges: Rising interest rates (private equity buyouts often use a lot of leverage/debt and so rising interest rates result in borrowing costs increasing) and the resulting decrease in valuations have significantly altered the dynamics of exits. Firms are now grappling with prolonged investment timelines, reflecting a shift in how deals are structured and executed.

3. Alternative Exits: The discussion on alternative exit strategies and the reluctance to take companies public due to market fears is particularly interesting and relevant. It prompts a reevaluation of traditional exit routes (IPOs - initial public offerings i.e. companies going public and offering their shares to the general public in order to raise money, and trade sales - i.e. being acquired by a bigger incumbent or competitor) and highlights the innovative approaches private equity firms may need to consider in the future.

In essence, this article not only celebrates a significant financial success but also offers deep insights into the evolving challenges, landscape and strategies within the lucrative and complex world of private equity.

That’s all for today. If you haven’t already, you can read yesterday’s issue here.

See you tomorrow!

Afzal

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