← Becker Business
Becker Business
Are There Too Many Private Equity Funds & the Stagnation of PE Returns 9-27-25
00:03:43
In this episode, Scott Becker examines why private equity returns have stagnated in recent years.
Loading summary
Transcript1 lines
- [00:00]
A
This is Scott Becker with the Becker Business Podcast. Becker Private Equity Podcast. Today's discussion is, are there too many private equity funds and the stagnation of PE returns? So here's the story today over history. You go back 20, 30 years, private equity funds largely outperform the S&P 500 over the last year to five years. That has not been the case. And quite frankly, some people look back 10 years and say private equity funds have barely outperformed the S&P 500. And for that outperformance of maybe 1 percentage point, 100, 200 basis points, you're giving up a lot of liquidity when you invest in private equity funds versus sort of the S&P 500 index. And people ask, why is that? And a lot of it is over the last five, seven years, interest rates have gone back up. So the ability to exit investments has gotten worse. So that has caused a lot of challenges for private equity funds that are often holding on to investments for five, seven years and longer when typically they'd intended to buy, build, and flip and be out in three to five years. So one is just the interest environment and the deal environment. The second issue which is now getting talked about more and more is is there are so many private equity funds. The count I saw today was about 7,000 private equity funds that are operating in the United States in some shape or form. Now, a handful of those, of course, not a handful. A dozen of those or so are mega, mega funds. But then there are a ton of smaller funds. And it reminds me a little bit of an old Warren Buffett phrase he used to say, everybody does well when things going well, when the tide goes out, you see who's swimming naked. And I think it's very similar with private equity funds. What we've seen over the last few years is more and more small private equity funds that tried to get into this when things were just. It seemed like everybody was making money. It was like a gold rush, just like investing in crypto at one time or gripping in other things at one time. And it seemed easy. So a lot of people got into the game. They raised some funds, they put it to work or try to put it to work, and they're finding now that they're stuck and they've not gone that well. We hear more and more reports of funds that have just gone broke. You know, they had originally some good returns and then have fallen apart entirely. And we see more and more of that. And of course, you have to have a certain size fund to be able to afford the staff and team off of the management feature, getting to try and build a team and invest and deploy capital and handle things well. And so we are seeing between the explosion of funds, independent sponsors, a lot of companies, funds, people chasing only so many great opportunities, and a interesting environment that doesn't make it easy either. So are there too many funds? Probably 7,000 funds out there. Lots and lots of headwinds. Today people talk about how there should only be 3,000 funds, 2,001. I don't really know what that number is. And of course, the point being, at least in part, is if you're going to be a smaller midsize fund, you better have a very specific thesis, a very specific reason that gives you an edge to be able to survive and thrive in this really challenging environment. Thank you for listening to the Becker Business, the Becker Private Equity Podcast. I find this discussion to be a fascinating discussion. I of course, came to the game late in terms of investing in private equity and venture capital funds and so not seen some of the returns that my colleagues saw 10, 20, 30 years ago. But it is what it is and it's all okay. Thank you for listening. Thank you very much.