More Private Equity Firms Are Becoming Targets of Deal Making

“This isn’t a bootstrap business anymore,” Ken Young, a partner at Dechert, said Thursday during a media briefing on private equity.

Brent Lewin/Bloomberg

Brent Lewin/Bloomberg

Private equity firms are increasingly the targets of deal making, a twist as the industry matures, according to Dechert attorneys.

The trend is being driven by founders’ desire to sell stakes in the firms they’ve built, succession planning, and the need for more working capital to fuel expansion strategies, Omoz Osayimwese, a partner at Dechert, said Thursday during a media briefing at the law firm’s New York office. Valuations are largely tied to the stream of fees charged by private equity firms, the Dechert attorneys said, with Osayimwese saying they typically collect 1.5 percent to 2 percent of assets under management.

A decade ago, it was harder to know what private equity firms were worth, according to Dechert partner Ken Young. Now firms such as Dyal Capital Partners and Stonyrock Partners, as well as businesses inside Goldman Sachs Group and Blackstone Group, have helped create more transparency through their purchase of stakes in alternative asset managers, he said.

While the fees charged by private equity firms haven’t changed much over the years, assets managed by the industry have soared. That expansion has accelerated as firms increasingly move beyond their buyout roots into areas such as private credit.

“This isn’t a bootstrap business anymore,” said Young. “The large ones want to be capital solutions providers.”

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Blackstone, co-founded by chief executive officer Steve Schwarzman in 1985, managed more than a half a trillion dollars at the end of September, according to a regulatory filing. The total $554 billion of assets included about $174 billion tied to private equity, the filing shows.

“We’re in a post-private equity world,” said Young, estimating that the top 35 private equity firms now have private credit businesses. He also pointed to the growing capital markets business of KKR & Co., the buyout firm co-founded by co-CEO Henry Kravis in 1976, as example of the industry’s evolution.

Meanwhile, institutional investors have been pouring capital into private equity funds.

Some managers are selling stakes so they have enough capital to contribute to new funds they are raising, as investors want to see they have sufficient “skin in the game,” according to Osayimwese. In other instances, he said firms may sell stakes to help fund the expansion of investing strategies or teams.

When it comes to their own portfolios, private equity managers face the challenge of having a lot of dry powder as purchase multiples keep rising, according to Dechert partner Markus Bolsinger. As deals become more expensive, private equity firms have found more attractive opportunities investing in complex corporate carveouts, he said.