Private fairness within the time of Trump | USAEMALL.com

Good morning. Treasury secretary Scott Bessent made dovish noises about China trade. President Donald Trump said he had no intention of firing the Fed chair. Two major, market-friendly reversals, and the S&P 500 is up only 4 per cent in two days? You just can’t please some people. Email us: robert.armstrong@ft.com and aiden.reiter@ft.com.

Private equity re-revisited

I am not the only person wondering if the big changes we are seeing in public markets — higher rates, higher volatility, and so on — may not be temporary, and may have profound effects on private markets, too. Jason De Sena Trennert, strategist at Strategas research, wrote earlier this week that:

For investment bankers and institutional investors themselves, the last three months have seen a transformation from unbridled enthusiasm to cautious optimism to, now in some quarters, superstitious hope . . . [there is] greater soul-searching and introspection of the uses and risks of relying on private markets to generate returns.

We have found there to be a strange dichotomy between the performance of the publicly traded private equity companies (which are down anywhere between 20 and 30 per cent year-to-date), the performance of the ETFs representing private credit (-1 per cent), investment grade credit (-1 per cent), and high yield (-3 per cent) . . . 

We believe it is instructive that a private institution with an endowment of more than $50bn [Harvard University] needs to float bonds to meet its operating expenses.

Trennert is right about Harvard’s bond sale, and he might also have mentioned news that Yale is selling as much as $6bn of private equity investments on the secondary market. That the US universities with the largest and second-largest endowments are both seeking liquidity at the same time tells you something — and perhaps not just about pressure on their federal funding from the Trump administration. 

Trennert is also right about the performance gap between the large asset managers/PE funds and the ETFs that hold broadly similar assets or asset classes. To give a flavour of this, here are some of the big private asset houses and ETFs for high-yield bonds and business development companies (which are private credit lenders):

The chart is suggestive. But it is important to note the differences between an unlevered ETF that buys publicly traded bonds, an ETF that owns the equity of leveraged lenders to small companies, and the stocks of huge asset managers with a variety of business models and investments. In particular, bear in mind that KKR, Blackstone and Carlyle have all been, to varying degrees, touted as earners of steady fee income, rather than collectors of interest payments or equity investors. The big decline in their share prices reflects compression of the very high valuations paid for those fee streams as interest rates and interest rate volatility have risen.

But KKR, Blackstone and Carlyle have another problem, too: in recent years it has proved harder to both put money to work in private equity investments, and to exit existing investments in sales or IPOs. And now that problem is coming to a head. Uninvested assets are building up, and investments are ageing to the point of being overripe.

My colleagues Antoine Gara in New York and Alexandra Heal in London wrote a few weeks ago about how this is spooking big investors:

Large institutional investors are studying options to shed stakes in illiquid private equity funds after the rout in global financial markets pummelled their portfolios, according to top private capital advisers . . . 

Dealmaking and IPO activity has ground to a halt, minimising cash returns. Moreover, pensions’ exposure to unlisted assets swelled this week as the plunge in public markets has created a “denominator effect”, in which private market holdings that are only marked quarterly rise as a percentage of their overall assets, skewing desired allocations.

So there are a number of factors at work. Years of few private investment sales, caused by a weak IPO market and rising interest rates, have left private equity investors overweight illiquid assets. Meanwhile, when public assets fall in value, those overweight positions appear even larger because they are not marked down alongside the public markets. This starts to look like risk concentration (bad) rather than lack of correlation (good). At the same time, an exogenous funding shock — Trump threatening to yank federal funding — has increased the liquidity needs of universities, a major class of private equity investors.

This is the kind problem I was gesturing at when I wrote a month ago that:

It is worth asking if the private equity industry, at least at a multi-trillion-dollar, world-consuming scale, was to a large degree a product of the unusual global financial conditions that prevailed in the last 40 years, and especially after the 2008 crisis.

By “financial conditions”, I meant the rate environment. What Trennert, Gara and Heal suggest is that there are more elements involved, including equity volatility, government spending, market structure and liquidity. “Uncertainty surrounding the new global economic order is an important change that may lead fiduciaries to seek more liquid investments,” Trennert writes. A trend to watch.

Spacs

Spacs are back. Special purchase acquisition companies — publicly traded shell companies that allow operators to raise money first, and acquire or merge with an existing group later — were all the rage in the euphoric days of 2021. What esoteric financial doo-dad, from crypto to meme stock, wasn’t? Surprisingly, though, Spac listings are creeping higher this year:

It’s not a big increase, but it’s noticeable. There was a slight uptick at the end of 2024, and though it is only April, 2025 is now about halfway to 2024’s total number of Spac issuances.

Though Spacs get a lot of hate, this is not necessarily a bad development. They have been around for a while, and provide benefits to most parties involved. Investors get a money market yield (guaranteed by someone else) while the Spac looks for a target, a stake in the company that is eventually bought, and the option to buy even more discounted shares at a later date; the company bought gets funding; and the Spac’s manager gets shares in the target company for their trouble.

But one of the big reasons Spac issuances fell out of fashion after 2022 is that they are terrible investments once they acquire a company, or “de-Spac”. According to our colleague John Foley at Lex, who crunched the numbers on the 482 de-Spacs on ListingTrack, 438 have produced negative investor returns, with the median de-Spac losing almost 90 per cent of its value. Yikes.

This is partially due to misaligned incentives. To get money out of the Spac, the manager has to merge with or acquire something within 18-24 months, leading to rushed deals. And institutional investors don’t really care, it turns out. According to research from Stanford and New York University, the institutional investor divestment rate is 98 per cent pre-merger. For them, the Spac, not the de-Spac, is the main appeal. Institutional investors collect the cash yield (possibly using leverage to amplify it), and treat the acquisition as an option. If they don’t like the look of it, they pull the plug ahead of time. The only real losers are the retail investors who hold on until the bitter end.

So, why the little flurry of Spacs now? We have heard a few theories, and have some of our own:

• Frozen IPO and private markets: According to Nick Gershenhorn, founder of ListingTrack, Spacs are picking up because private markets (like the IPO market) are “drying up now. [Many companies] may figure Spacs are a faster way to go public and get access to capital, particularly emerging technologies plays that are capital intensive, like nuclear reactor start-ups.”

• Expectations of looser M&A environment: Many investors expected looser M&A and dealmaking rules under the Trump administration, clearing the way for Spac acquisitions. Hasn’t happened yet, though.

• Safe way to park cash: In a risk-off environment, institutional investors are going to hold cash anyway. But markets could revive in the future; why not get the free equity option?

• Market vibes: The Trump administration has encouraged speculative trends such as crypto, and there is a wild west feel at the edges of markets. Despite the major stock indices being down, there remain some feverish risk seekers out there, as well as people willing to take their money.

(Reiter)

One good read

Narcocorridos.

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