Wall Street Private Equity Gets Bigger in Every Way
By Meredith Chaffin and Carter Dougherty
Communities across the United States have faced challenges at nearly every turn since the beginning of the COVID-19 pandemic. But Wall Street’s private equity barons are having the time of their lives. This increasingly predatory industry smashed previous records to complete $1.2 trillion worth of acquisitions in the United States in 2021, an all-time record. Globally, the industry gobbled up companies worth $2.1 trillion.
Private equity, which used to be known as the leveraged buyout industry, acquires other businesses mainly using borrowed money that the target company has to repay. This sector works with money from institutional investors, such as pension funds and endowments, and ultra-wealthy individuals. And, once it owns companies, private equity has a track record of worse working conditions, pay cuts, job losses that fall disproportionately on people of color, harm to the environment, closure of businesses, and higher prices for consumers and small businesses.
By mid-2021, the private equity industry as a whole had already amassed a record $3.3 trillion of unspent capital, including $1 trillion explicitly held by buyout funds, which are set up to take over entire companies.
“Everything that is investible, private equity is figuring out a way to invest in,” Wylie Fernyhough, a senior analyst at PitchBook, told Yahoo Finance. “You’re seeing a lot of activity in, quite frankly, pretty much every space imaginable.”
Private equity has always been about the significant transaction, the big buyout fund, and of course, the big payout. But the “investment” that the industry likes to tout – spending to create jobs, improve technology, and upgrade worker skills – is too often neglected by this industry, even as its leading figures add to their already astounding wealth.
Blackstone, KKR, and Apollo have seen massive appreciation of stock prices, with Blackstone’s alone having more than tripled from March 20, 2020 to December 31, 2021; KKR’s quadrupled. Blackstone’s CEO, Stephen Schwarzman, has seen his net worth triple to an unfathomable $37.5 billion.
The biggest of the big are ruling the roost. KKR alone raised a record of $59 billion in the second quarter for various private market endeavors; Carlyle is looking to raise as much as $27 billion for its latest flagship fund, which would be the largest private equity pool ever.
Private equity also set a record that demonstrates its continuing strategy of saddling companies it buys with low-quality corporate debt.
Loans with junk-level credit ratings for private equity buyouts rose to a record $331 billion, surpassing the earlier record set in 2007. Overall, private equity loaded companies with more debt, measured as a multiple of earnings, than acquisitions by non-financial corporations did. Companies backed by private equity firms assumed debt equal to an average of six times earnings, more than the record set in 2019 or in any of the past 20 years.
Private equity has gotten so enormous that, even in the context of the currently booming business of mergers and acquisitions of all kinds, it is becoming a dominant force. As a whole, companies in the United States had announced over $2 trillion in M&A transactions in 2021 by early October, putting corporate America on pace to have the most active M&A year ever. And still, private equity manages to boost its own share, globally, to an unprecedented 27 percent of all M&A transactions, the highest on record. That number was 20 percent only a year ago and a mere 7 percent in 2009. More and more, M&A is a private equity game.
“One of the biggest takeaways last year was the breadth and depth of deal activity — it’s no longer just leveraged vanilla buyouts of asset-heavy companies anymore,” said Fernyhough, the Pitchbook analyst. “You have private equity firms focusing on technology and health care, and you have private equity deploying capital into sports teams and music rights.”
As the world attempts to emerge from the pandemic, private equity has been, literally, partying on. At its annual gathering in Berlin, known – without a trace of irony – as SuperReturn, private equity barons had their expensive celebrations, with karaoke, five-course meals, and some striking honesty.
Jan Stahlberg, who runs buyout group Trill Impact and has worked in private equity since 1995, admitted why private equity is getting so rich, and it wasn’t flattering. “We’re benefiting massively [but] a lot of people have suffered in this crisis,” he said. “It’s the hottest market I’ve seen in my entire career.”
More ominously, Philipp Freise, KKR’s co-head of European private equity, warned that the combination of high prices being paid by new acquisitions and the massive debts the industry generates is creating the risk of “the dotcom boom meeting with the financial crisis.”
Meanwhile, analysts expect the industry to have “a huge 2022.”