Private equity superstores overstock the shelves

Stey eddies. Private equity investors seem happier se days shopping for returns at specialty shops over supermarkets. In what has been a tough year for fundraising, Clayton, Dubilier & Rice and CVC Capital Partners have accumulated more cash for ir flagship buyout funds than peers Blackstone and Apollo Global Management, which oversee a broer range of investment vehicles. It’s one of first big challenges to diversified business model typically embraced by publicly listed alternative asset managers.

U.S. private equity funds raised some $240 billion in first nine months of 2023, according to research outfit PitchBook, 13% less than a year earlier. It’s no shame n that some of latest flagship buyout vehicles are smaller than ir predecessors. firm led by Steve Schwarzman, for example, said over summer that it expects its Blackstone Capital Partners IX to end up with “a total size in low-20s billion-dollar range”, compared with roughly $26 billion committed to its 8th fund. Apollo boss Marc Rowan, meanwhile, helped close his firm’s Fund X at about $20 billion, one-fifth less than $25 billion Fund IX.

Two smaller and more narrowly focused investors have defied slump, however. New York-based CD&R in August raised $26 billion for its 12th-generation private equity fund while Eurocentric CVC managed an even more eye-popping $29 billion in July. It represents largest buyout fund ever raised, per PitchBook data, while latest Blackstone and Apollo efforts don’t even make top five.

Investors, known in private equity as limited partners, back specific funds for different reasons, which makes it tricky to ascertain what explains discrepancies. It’s notable, however, that two clear winners from 2023 fundraising cycle are rooted in tritional buyouts. business of buying and selling whole companies accounts for about 70% of assets under management at CVC and it’s all that CD&R does.

For Apollo and Blackstone, private equity has shrunk in significance. Rowan has been transforming his 33-year-old firm, which invests $630 billion on behalf of clients, into even more of a credit and insurance investor. Schwarzman’s shop, whose biggest single asset class is real estate, last month touted more than 70 distinct strategies across $1 trillion it manages. founder summed it up last year when he said, “Our customers are constantly in our store and our shelves are full.”

re are various ories about why sprawl may be out of favor this season. One, suggested largely by unlisted firms, is that LPs are starting to mistrust motives behind diversification. Kingpins like Schwarzman and Rowan care more about keeping ir stock prices elevated by accumulating more cash to oversee for a variety of assets, rar than ensuring any single fund does well, or so ory goes. On this account, savvier investors are flocking to smaller, unlisted buyout shops whose bosses are mostly paid out of fund profit, meaning y share more of an incentive to achieve better performance.

idea doesn’t entirely stack up, though. For starters, it’s an open secret that CVC has been considering an initial public offering for at least a year. Limited partners clearly didn’t punish firm over prospect of senior executives being paid in listed stock. Nor is it true that dealmakers at Blackstone and Apollo are disinterested in creating alpha. While top brass is paid heavily in shares, fund managers earn most of ir fortunes from profit known as carried interest. In or words, people running portfolios are just as interested in returns as LPs, increasingly so as compensation policies tilt toward this more volatile source of income.

A better explanation, from consultants who vise LPs on where to put ir cash, is that private equity supermarkets may be cannibalising mselves. Since raising its n-record-breaking buyout fund in 2019, for example, Schwarzman’s shop has landed $8 billion for a longer-life private equity fund, nearly $7 billion dedicated to Asia and about $9 billion across two investment pools seeking younger, fast-growing firms to back. It’s entirely plausible that some of money would have orwise been directed into Blackstone’s flagship fund.

CD&R avoids this risk by only raising one main fund at a time, while CVC is somewhat of a blend. Luxembourg-based firm led by Rob Lucas separately targets Asia, growth equity and investments that extend beyond typical five-year time horizon. Even so, various iterations of its core Europe and Americas fund account for lion’s share of CVC’s private equity assets, according to its website.

A third possibility, and perhaps most troubling for Schwarzman and Rowan, is that superstores’ flagship funds don’t always deliver leing returns. Blackstone’s sixth and seventh flagship buyout funds, which started investing in 2011 and 2016 respectively, both h generated a 13% internal rate of return, after deducting fees, as of Sept. 30. eighth-generation fund, which has been writing checks since early 2020, is running at a 12% net IRR.

Those figures are mittedly better than 11% earned by U.S. pension funds on ir private equity investments between 2000 and 2021, according to a study by alternative investments viser Cliffwater. But y’re still below roughly 15% net IRR that buyout dealmakers typically target. Apollo’s performance, meanwhile, has been more erratic. Its eighth fund, a 2013 vintage, h a disappointing 10% net IRR as of Sept. 30, while 2018 Fund IX is at 24%, on paper.

numbers are patchier for unlisted CVC and CD&R. Calpers private-equity performance database shows European firm’s 2014 and 2018 vintages generated respective net IRRs of 18% and 23% as of December 2022. Limited partners may reckon that such consistent outperformance implies that Lucas has found a repeatable formula. same data gives CD&R’s 2018 fund a stellar 39% net IRR, which would explain why investors were keen to plough money back into its successor.

se results suggest re’s no clear, consistent edge from stocking everything from credit to infrastructure. Until y can prove orwise, more scattered private equity superstores risk losing more ground to specialists. After all, flagship funds are starting to look like just anor product on ir shelves.

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Apollo Global Management said on Nov. 1 that its Fund X buyout fund h invested about $3 billion of roughly $20 billion it h raised earlier in year. company’s previous flagship private equity fund started investing its $25 billion of committed capital in 2018 and h generated a 24% internal rate of return after fees, as of Sept. 30.