A significant shift is underway within the private equity sector, according to Philipp Freise, Co-Head of Europe at KKR. The cyclical nature of the industry – characterized by acquiring companies, fostering growth and ultimately selling them after several years – has become disrupted, a situation Freise describes as unprecedented.
The core challenge stems from a current lack of opportunities to divest portfolio companies. This has left many firms holding numerous investments that cannot be readily sold, directly impacting the performance of numerous funds and leading to returns that do not meet expectations. Freise anticipates this situation will trigger a period of consolidation across the private equity landscape.
Beyond this internal pressure, a global realignment of capital is also being observed. While the United States’ dominance is waning, Europe is increasingly attracting investor interest, a trend that extends to KKR’s investment strategy. The traditional reliance on institutional investors is evolving, with private capital now contributing significantly – approximately 20% – and poised to grow substantially in the coming decade, potentially reaching 30%, 40%, or even 50%. This influx of private capital could lessen the private equity sector’s vulnerability to traditional cyclical patterns.
Freise attributes part of the current predicament to the European Central Bank’s low-interest-rate policy during the COVID-19 pandemic. This environment facilitated debt-financed acquisitions, leading to a rapid pace of investment and capital deployment that, in retrospect, may have been excessive. The higher frequency of investments and capital draws has contributed to the current market dynamics.