The biggest private equity firms generated record profits from selling investments as markets charged ahead in 2021. It’s going to be a tough act to follow.
Blackstone Inc., Apollo Global Management Inc. and Carlyle Group Inc. collectively sold out of almost $150 billion in deals, double that of the prior year.
The influx of cash pushed earnings to new highs, minted new wealth for dealmakers and added to private equity’s allure during Wall Street’s war for talent. But the cash surge was a reminder of how the profits from exits are tied to the broader economy. Rising interest rates, inflation and the specter of Russia’s invasion of Ukraine now threaten to slow the torrid pace of realizations -- and the industry’s fortunes.
“Everything we’re watching in public markets could reduce the returns of private equity,” said Andrea Auerbach, global head of private investments at Cambridge Associates, an adviser for pensions and endowments. Returns across the industry, while good, “are largely built on unrealized value,” she said.
The pursuit of fast-growing companies by private equity firms could leave some vulnerable as rates increase and diminish the value of future cash flows and reduce valuations.
But 2021 was nothing short of an extraordinary year. Blackstone cashed out of a record $77 billion of investments as its corporate private equity and opportunistic real estate holdings rose more than 40%. KKR & Co. made a record $2.1 billion from successful exits in 2021, up 84% from the prior year.
Fast forward to 2022, and executives have signaled on earnings calls that this year will be different.
While Apollo Co-President Jim Zelter said the firm expects its “realization super-cycle to continue,” he also warned that exits could be delayed to later in the year if the current market persists. Apollo’s realizations nearly tripled in the year to $25.7 billion, with its private equity arm cashing out of a record $19.1 billion in deals.
Carlyle’s Chief Financial Officer Curtis Buser tempered market expectations.
“2021 was a special year” with the cash from exits, he said. But he also warned that such results “will be difficult to replicate.”