Private equity on track to underdeliver for investors

The boom of pre-2022 has well and truly worn off for private equity, and funds are likely to fall short on the returns promised to investors, experts and investors tell the Financial Times. Geopolitics, overvaluations, and investor pressure are all squeezing an asset class in a four-year downturn.

Where it began: The PE boom can be traced back to the period between 2019 and 2021, when the low interest rate environment of the post-2008 era met with a wave of financial stimulus packages on the back of the pandemic. The result was a record-breaking 2021, as the value of buyout transactions doubled and broke the USD 1 tn ceiling for the first time.

Now, it’s a very different story. The investment class has been in a four-year downturn, and between two-thirds and 90% of funds that started in that era are now falling short of their targeted returns, the sources said. Last decade, PE averaged returns of 25% of net assets to investors. Now, that figure is less than 15%.

The pinch is also coming from two sides: speed and values. The internal rate of return measures how much and how quickly a fund delivers its returns. One top executive expects funds that deployed capital between 2019 and 2021 to land at an average IRR of just 7-8% once all is said and done. The majority of firms aren’t likely to meet their IRR targets at all, according to Advent’s Managing Partner James Brocklebank, while two other fund investors see IRRs settling in the low double-digits — well below the typical high-teens target after fees.

That tracks with what we’ve noted so far, and shows the strain isn't confined to the West: PE and VC exits slowed to USD 2.7 bn in MENA in 1H — a fraction of the USD 386 bn Bain estimates buyout funds exited globally over the same period — putting 2026 on track to record the lowest exit value since 2017, despite private equity transaction values outpacing last year’s figures so far at USD 8.6 bn for 1H.

The current exit strategy (or lack thereof): Industry executives said during the IPEM conference that many funds aren’t selling yet, hoping to avoid the hit to returns in the current environment.

Pressure is also mounting from investors: They aren’t willing to sell out at a reduction but are also calling for more liquidity, Summation Capital’s CIO Roger Vincent says. For now, the sector looks increasingly stuck between a rock and a hard place.

MARKETS THIS MORNING-

Asian markets are mixed in early trading, with Japan’s Nikkei up 0.4% and South Korea’s Kospi flat. Wall Street equities dropped as comments about AI safety concerns from tech leaders sparked a sell-off in Nvidia and chip stocks.

THE CLOSING BELL-

The ADX rose 0.1% yesterday on turnover of AED 1.5 bn. The index is up 1.3% YTD.

In the green: Space42 (+6.5%), Bank of Sharjah (+2.5%), and Waha Capital Capital (+2.4%).

In the red: Al Buhaira National Ins. Company (-4.6%), Rapco Investment (-3.9%), and Two Point Zero Group (-3.4%).

Over on the DFM, the index rose 0.6% on turnover of AED 1.1 bn. Meanwhile, Nasdaq Dubai was up 0.7%.