In our first issue, we opened with an interview with you, Steven, about how the credit bubble of 2006 and 2007 would affect returns and the industry. You talked about how returns from these vintages would be negative, LP commitments would reduce and the industry would contract. What’s your perspective on this today?
“The 2006 to 2008 vintages turned out better than I thought – they were equal to those of the S&P 500, although they were still the worst years for PE. Back in 2007 and 2008, we saw a boom in deals, the stock market was robust and interest rates were low. It looked a lot like what we saw in 2020 and 2021, when there was an explosion of activity. Just like in 2009 and 2010, we are now seeing some indigestion and, just as in 2009 to 2011, fundraising totals are low.”
“It’s worth saying that the world didn’t end then for PE, as some were predicting after the GFC. It’s unlikely that the 2020 and 2021 vintages will be great. It will be interesting to see if they beat the S&P 500 because it’s a challenging benchmark for PE. The Russell is probably a closer match – and it’s easier to beat because it has performed poorly.
“Right now, sellers are looking for values they could have achieved in 2021, while buyers are looking for lower values more consistent with today’s environment. At some point, we will start to see buyers and sellers come closer, just as we did in 2011 to 2012. If interest rates go down, buyers will be willing to pay more, closer to what sellers expect now. If interest rates stay high, sellers will capitulate and sell at the prices buyers are now willing to pay. Buyers and sellers returning to the deal market happened after the dotcom bust and after the GFC. I see no reason to believe it will be any different this time around.
“PE won’t die, but will it grow? It definitely needs to deliver returns at least as good as those of public markets. Those who can do this will raise capital from LPs; those who can’t won’t.”
Steven Kaplan