See this chart of the LPX50 for the past 12 months… wow is all I can muster. The LPX50 is an index of the largest 50 liquid listed private equity funds. The LPX50 is obviously affected by market sentiment and market movements, so to be fair, it’s not the best representation of large unlisted funds. But to be fairer, we’ve seen endowment funds writing down their unlisted private equity investments by similar magnitudes.
The LPX50 has dropped some 60-70% in 12 months. That’s dystopia in anyone’s language. But, I find myself asking why values have dropped so much in such a short period if the world still has a relatively strong pulse. Here are the few off-the-cuff reasons why large funds are having a harder time:
Mega-buyouts enjoyed a period of higher and higher multiples (over paying maybe?) and easier and easier debt up to 2007 (over gearing maybe). But, that’s finished. The fallout from being overly optimistic is much worse than most of us thought it would be (including me). If there’s anything to learn here, it’s that low purchase multiples and low gearing are key to sustainable private equity investing. Also, businesses are always going to be sensitive to falls in sales when they’re even only moderately geared.