BREAKINGVIEWS-Buyout barons grimly accept blue normal in Berlin

By Liam Proud

BERLIN, June 5 (Reuters Breakingviews) - “Live, laugh, leverage” is the incongruous phrase emblazoned on some promotional tote bags at this week’s SuperReturn International conference. It’s hard to imagine a less-fitting sentiment for the mood among the assembled buyout barons in Berlin. Over bitter coffee and sweet treats, they fretted about a nearly $4 trillion haul of unsold portfolio companies. The grim consensus: these assets may be stuck for a while and threaten a painful industry shakeout.

Not all the chatter was bleak in the InterContinental Hotel, where Apollo Global Management APO.N President Jim Zelter and Thoma Bravo co-founder Orlando Bravo are among those roaming the halls. For managers who have expanded beyond old-fashioned leveraged buyouts, spirits were higher when conversations turned to asset-backed finance, which includes loans secured against everything from music royalties to student debt. And there’s broad agreement that rich individuals will keep backing so-called evergreen funds, such as Blackstone’s BX.N fixed-income behemoth BCRED.

The nagging slowdown in buyout deals was a hard topic to avoid, however, amid sessions on “the 800-pound gorilla in opportunistic credit” and insights from tennis superstar Serena Williams. Sluggish exits have left a hulking backlog of assets to sell and a “distribution drought” for underlying fund investors known as limited partners. Buyout shops collectively paid out close to a tenth of the unrealised value in their funds each year from 2022 to 2024, compared with one-quarter on average over the previous decade, according to Breakingviews calculations using Preqin data. Small wonder then that many pension plans and university endowments have refrained from committing capital to newer vintages. Private equity fundraising tumbled for the third consecutive year in 2024 to the lowest annual level since 2016, according to consultancy McKinsey.

The idea, for a while now, has been that the slump would end. Lowered borrowing costs and a supposedly business-friendly White House would spur the mother of all M&A booms, allowing buyout barons to offload ageing inventory and get the cash wheel spinning again, or so the theory went. Then came U.S. President Donald Trump’s slapdash tariff plan in April and prospects of stagflation for the world’s biggest economy. A grim reality is now settling in, at least according to many of the dozen or so investors and advisers who spoke to Breakingviews: crystallising value will take years and may require accepting lower prices than usual.

Simple math helps to explain why. Buyout exits totalled almost $160 billion in the first quarter, before Trump kicked off an international trade war, implying an annualised pace of roughly $630 billion, per a Bain & Co. analysis of Preqin data. On that pre-Liberation Day basis, it would take nearly six years to clear the backlog.

Moreover, the reality is even worse. The value of buyout assets should, in theory, grow at about 15% a year, in line with the returns managers promise limited partners. Some $3.6 trillion of inventory in 2025 should therefore become $4.1 trillion by 2026. The $500 billion gap would count as a reasonable exit year by recent standards. In other words, private equity practitioners are relying on a rebound from 2023 and 2024 sales volumes just to keep big fund managers sweet, let alone shrink the existing figure of unsold assets.

A hot market for secondhand portfolios and money from mom-and-pop investors could be fruitful seams. Both are tiny compared to the size of the problem, however. The takeaway is that valuations, and thus returns, will have to give.

The tougher question is pinpointing who will suffer most. Larger buyout funds tend to have good reasons why life will be toughest for their smaller brethren, who themselves make plausible arguments about the outlook for industry goliaths. Many in Berlin accept that trouble abounds, just not for their firm. In some cases, confidence is clearly justified: Thoma Bravo just raised $34 billion across three funds.

Doing the rounds nonetheless was the spectre of zombies, or managers that will struggle to raise a new fund and instead be left to scratch out fees from the last ones. It’s hard to kill buyout barons, but macabre market conditions suggest there will be a very unfunny rise in the undead.

Follow Liam Proud on Bluesky and LinkedIn.

CONTEXT NEWS

The SuperReturn International conference runs from June 2 to June 6 in Berlin.