Buyout barons are finance now, for good and ill

Reuters

17-04-2025

NEW YORK, April 17 (Reuters Breakingviews) - Private equity is supposed to be patient when public markets panic. Yet for shareholders in Blackstone (BX.N), opens new tab, KKR (KKR.N), opens new tab, Apollo Global Management (APO.N), opens new tab and Carlyle (CG.O), opens new tab, it's proving hard not to get swept up. The buyout barons, now self-styled as alternative asset managers, claim to represent a new and in many ways superior answer to traditional financial business models. The stock market, though, hasn't reflected that idea during the recent tariff-induced turmoil.
Private-capital groups like to argue that they're relatively insulated from market swings like the one unleashed by U.S. President Donald Trump's April 2 announcement. Buyout managers, for example, re-mark their asset valuations coolly quarter-by-quarter, ignoring daily gyrations. And their portfolios are tilted towards services-based industries like information technology and healthcare, which should be less sensitive to trade wars. In 2023, some 30% of private equity's assets sat in IT, according to MSCI. They're also light on tariff-sensitive consumer and materials businesses – and increasingly invested in long-term, steady, inflation-protected infrastructure assets like toll roads and data centers.
Meanwhile, debt-market dislocations tend to boost the managers' private-credit arms, which now account for more assets than the traditional buyout divisions of Stephen Schwarzman's Blackstone, Henry Kravis' KKR and Marc Rowan's Apollo. A similar shutdown in liquid financing markets in 2022 turbocharged the alternative debt providers: buyout deals now use direct lenders rather than bank underwriters by a ratio of over 8 to 1, boutique adviser Configure Partners reckons, opens new tab.
Despite it all, the quartet's shares have fallen by 12% to 24% since 'Liberation Day' – worse than the S&P 500 (.SPX), opens new tab insurance and banking indexes, which are down 5% and 10% respectively. In other words, when stock-market investors are gripped by fear, Schwarzman and Kravis's firms trade much like the rest of the financial system – or worse.
There are good reasons for this. As Carlyle boss Harvey Schwartz noted in his annual letter, opens new tab last week, the number of U.S. private firms has multiplied six-fold to more than 6,000 over the last two decades, meaning that buyout shops inevitably reflect a broader swathe of a now-slowing economy. Carlyle also reckons that private credit is a $1.8 trillion market, equivalent to 10% of the total credit, opens new tab extended by all U.S. commercial banks. The sheer size makes it unlikely that direct lenders would be able to dodge any wave of corporate defaults. So does the fact that private credit has spread from its mainstay of leveraged buyouts and mid-sized corporate lending into various types of asset-based finance, stretching from securitized student loans to buy-now-pay-later products and beyond.
Meanwhile, companies sitting in private-equity portfolios tend to carry high debt loads, with nearly 14% of those rated speculative-grade deemed by Moody's to have weak liquidity, versus less than 5% for other private firms. Managers used 2024 to push off maturities, with debt due by the end of 2027 falling 60% to $211 billion between the end of 2023 and November last year, according to Configure. But slowing revenues, rising inflation and higher interest rates could still cause a cash crunch for some. High-yield credit spreads, or the extra return over benchmark rates that investors require for holding risky debt, have risen by a full percentage point since early March to over 4%, according to the ICE BofA Index, opens new tab.
Tariffs also snuffed out any lingering hopes of a 2025 dealmaking renaissance. Buyout barons sit on $3 trillion of unsold assets, which now look even harder to shift. Private-equity owners offloaded almost $90 billion of businesses in the first quarter, which was up 17% year-on-year but a third down from 2021's peak, according to LSEG data. The rest of 2025 will probably be worse. Analysts have lowered their estimates for Blackstone's haul from portfolio company sales this year by nearly a fifth since April 2, according to Visible Alpha. The lowest of the broker forecasts puts the figure back at last year's lugubrious pace of just over $800 million, which was half 2021's level.
All of this leaves fund backers, known as limited partners or LPs, starving for cash. They can find relief by selling their stakes in private equity or credit funds on the secondary market. Conversations about these deals are picking up, people familiar with the matter told Breakingviews, though mooted prices have fallen a bit below the roughly 90% of face value that was commonplace before the tariff barrage. And the timing of Trump's broadside makes these trades even harder. Liberation Day came just after managers' quarterly valuation adjustments, which means the reference prices for any secondary sales are now out of date.
The LP liquidity crunch may stifle future fundraising for Carlyle, Blackstone and the rest. So would a possible move by major global investors to trim their U.S. exposure in the wake of Trump's volatile policymaking and a sliding dollar. Some of the private-capital industry's biggest backers are Canadian, Australian, Dutch and Saudi Arabian pension and sovereign wealth funds. Many of the same players will also be suffering from the shrinking value of their public equity portfolios, which can create problems for their private assets. LPs, particularly pension funds, often aim to only have a certain percentage of their portfolios stuck in illiquid assets – a proportion that mechanically balloons when the stock market crashes, in a phenomenon known as the denominator effect. Major pension funds now hold billions more than they bargained for in private equity, according to S&P Global, opens new tab, making them unlikely to commit fresh cash.
True, alternative asset managers are still fundamentally different from traditional financial companies like banks and insurers. Blackstone, KKR, Apollo and Carlyle do not depend on the capital of flighty depositors who can withdraw money at any time, and any writedowns on their equity or debt portfolios are primarily a problem for customers rather than shareholders. But for Kravis and Rowan's groups, taking insurance assets and liabilities onto the companies' own balance sheet has muddied the waters. Strikingly, the stock selloff didn't discriminate much between insurer-owning KKR and Apollo and asset-light Blackstone. After years of muscling aside Wall Street, maybe it's no surprise that private-capital firms now get caught up in an indiscriminate anti-finance trade.