Private Equity’s Quiet Crisis!

This August, President Trump signed an executive order allowing private equity firms to tap into America's 401k system. The stated goal was to democratize access, to stop babying smaller investors, and to let them play in the same sandbox as pension funds and sovereign wealth fund managers. Nothing says democratization like handing your retirement savings to Apollo. So, why are the shares of publicly listed private equity firms underperforming the broader stock market so badly this year?

You'd expect a rally. Instead, the GLP index is down nearly 10% year to date, and it's even down slightly since the announcement in early August. Apollo and Blue Owl are off more than 20% year to date. KKR, Aries, and TPG are all in doubledigit decline.

Blackstone is down, too, with Carlilele and ThreeI being outliers up more than the S&P. It turns out that letting retail investors into the sandbox doesn't necessarily help if the Sandbox is full of broken toys. The Wall Street Journal points out that some of the underperformance might reflect an overhang from the runup in stock prices over the last few years, especially for some of the big firms who rallied ahead of being included in the S&P 500. But there are still concerns hanging over the industry.

Private equity firms are struggling to sell prior investments at attractive prices. And without exits, there are no distributions. Without distributions, it's much harder to raise new capital. Private equity is still sitting on trillions in assets, but the flywheel, raise, deploy, exit, distribute, and repeat isn't spinning the way it used to.

And the push into 401ks looks maybe less like innovation and more like a search for new investors when the existing ones are getting frustrated. The S&P 500 is up around 14% this year if we include dividends, but it hasn't been a broad-based rally. The returns have been concentrated in a handful of tech giants, the Magnificent 7 minus Tesla Plus Broadcom, which make up more than a third of the index. These firms are growing earnings, throwing off cash, and doing it with less leverage than their predecessors in the dot era.

Investors have been paying up for profitability and the market has been rewarding them. Private equity doesn't own any of these companies and it doesn't own anything like them either. PE firms tend to own smaller businesses often in slower growing ...