A widening gap in price expectations between buyers and sellers of companies is proving fatal to would-be deals
Save time by listening to our audio articles as you multitaskIf trouble is to strike, it will hit an industry that is now hubristic and vast. The amount of money invested, or waiting to be invested, by private-equity funds has swelled from $1.3trn in 2009 to $4.6trn today. This was driven by a scramble for yield among pension funds, insurance companies and endowments during a decade of historically low interest rates in the aftermath of the global financial crisis of 2007-09.
But such “orderly” exits are drying up fast. Market turmoil means stockmarket listings are off the table and companies are thinking harder about spending cash on acquisitions ahead of a recession. Sales from one private-equity fund to another will not sustain an alternative reality of high valuations. For some fund managers, adjusting valuations will be painful. Funds which bought companies at a premium to sky-high stockmarket prices will suffer significant mark-downs.
The fate of the $1.3trn waiting to be invested by private-equity firms, known as “dry powder”, is also uncertain. Volatile valuations are one immediate obstacle to spending it. . On 28th June Walgreens Boots Alliance, the American parent company of Boots, a British pharmacist-cum-retailer, called it quits on the sale of the well-known British brand after lengthy talks with potential private-equity suitors failed.
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