Michael Sonnenfeld, Tiger 21
Scott Mullin | CNBC
Sonnenfeld told CNBC on Friday that the members of the Tiger 21, which collectively manage about $150 billion in assets, have tripled their allocation to private equity over the past decade and are increasingly focused on AI and climate change. He said he sees further opportunities as companies are expected to do well.
Most of the members of Tiger 21 are entrepreneurs who have sold their companies and are now in the asset preservation business.
“Cash holdings are about 12% and public equity has been reduced, but real estate went down a year or two ago because of rising interest rates, and now private equity is king,” Sonnenfeld said. But the business is still expanding.” .
“Obviously, it's a little bit more difficult because of the availability of credit, but what our members are particularly looking at is private equity, because if you have a fundamental business that's growing rapidly, you can take the market. Because you can outperform.”
Sonnenfeld revealed that the share of private equity in members' portfolios has increased from 10% to 30% over the past decade, with venture capital accounting for a larger portion than ever before.
“Many of our members recognize that AI is a huge opportunity, climate change is a huge opportunity, and obviously the energy market is strong, so our members recognize that long-term fundamental “We really think it will drive growth,” he said. Added.
According to EY's quarterly report, private equity activity in the second quarter of 2023 increased by 15% compared to the first quarter, with total deal volume reaching $114 billion on the back of a surge in Europe.
However, not everyone is convinced that the optimism is justified. Dan Rasmussen, founder and chief investment officer of hedge fund Verdad Advisors, told CNBC on Friday that the industry is facing a “perfect storm” after sharply rising interest rates and falling tech company valuations. ” he said.
“There are three big issues facing private equity,” he said. “One is that private equity is largely leveraged. The average acquisition is a net Approximately 60% of the debt is utilized, and almost all of that debt has variable interest rates.”
As interest rates have risen dramatically, average interest costs for private equity firms have skyrocketed. According to the private equity and venture capital industry, median interest expense as a percentage of EBITDA (earnings before interest, tax, depreciation, and amortization) was 43% in 2022, compared to The median across S&P 500 companies was 7%. Beldado advisor.
“The second problem is over 40% of private equity is exposed to the technology sector and technology valuations are falling, so as you see multiples falling, that creates further problems. “It's causing this,” Rasmussen said.
Cumulatively, this means that the private equity industry is acquiring companies with higher debt burdens than the public market at premium valuations.
While some large tech companies with significant exposure to AI have seen their valuations soar this year, pushing up broader sector averages, highly leveraged smaller companies have generally not benefited in the same way.
The US Federal Reserve has raised interest rates by more than 500 basis points (bp) in the past 18 months, from a target range of 0.25-0.5% in March 2022 to 5.25-5.0% in July. raised to 5%.
The U.S. Federal Open Market Committee opted to pause the rate hike cycle this month, but the central bank has signaled that interest rates will remain high for a longer period of time, a move typically seen in markets aiming for rapid growth. This is negative for the highly leveraged parts of
“From a quantitative perspective, the fundamentals of sponsor-backed companies look scary,” Rasmussen said in a research note earlier this year.
“However, private equity remains a darling asset class for sophisticated investors, with many endowments and family offices having allocations approaching 40%.Given such high levels of enthusiasm, , financial fundamentals appear to be much less attractive than expected.”
