Unhedged: "Private equity’s public reckoning"

Podcast: Unhedged by Financial Times & Pushkin Industries
Date: September 16, 2025
Host(s): Katie Martin, Robert Armstrong
Guest: Antoine Gara (FT's private equity expert, New York)

Episode Overview

This episode explores the current challenges facing the private equity (PE) industry, with a focus on the increasing difficulty of exiting investments through public markets. The conversation dissects the phenomenon of "private equity constipation"—the backup in deal flow as firms struggle to list companies, instead recycling assets through continuation funds and secondary markets. The panel also contemplates whether the industry's golden era of returns has passed and touches on the implications for both institutional and retail investors.

Major Discussion Points

1. How Private Equity Works: Origins and Mechanics

Timestamps: 02:23 – 05:44

• Basic Structure: PE firms raise funds from pension and sovereign wealth funds, acquire companies, improve them (often via debt and operational changes), and then attempt to sell at a profit within a set fund duration (typically 10-12 years).
• Return Expectations: "Two to three times your return is the general expectation." (Antoine Gara, 02:48)
• Key Drivers of Returns:
  • Heavy use of leverage (50% debt financing not uncommon)
  • Operational improvements and sector selection
  • Selection of undervalued or beaten-down public companies
• Caveats: Return figures often "come with a little bit of gaming," such as using subscription line facilities to artificially boost IRR metrics. Gara calls this "cigar box accounting." (04:32)

2. The Exit Problem: Why is PE 'Constipated'?

Timestamps: 05:44 – 11:07

• Exits in PE: Essential for distributing returns; typically occur via selling to other companies, PE firms, or public listing (IPO).

• Current Issues:

  • IPO markets are dormant, especially post-pandemic and amid rising interest rates.
  • Companies are being held much longer before exit; “the median age of IPOs… was five years. Now it’s 14 years.” (Katie Martin, 11:57)
  • Instead of IPOs, deals are often internal: “Private equity selling stuff to itself is really common now,” especially via continuation funds or sales between PE funds.
  • 50% of asset sales now occur between PE firms. (Antoine Gara, 10:12)

• Example (David Lloyd Gyms): A posh gym chain in the UK sold from TDR to… another entity within TDR, via a continuation fund. These “pass-the-parcel” transactions are becoming prevalent, enabled by complex financial engineering.

  “Here’s the glory of capitalism and financial engineering at work.”
  (Antoine Gara, 07:52)

3. Continuation Funds, Secondaries, and Market Complexity

Timestamps: 07:24 – 09:33

• Continuation Vehicles: Mechanism for PE firms to keep holding (but repackage) favorite assets as original funds age.
• Secondaries Market: Growing avenue where existing PE assets are sold at a discount to specialist buyers. Positions may be rolled over or sold, but the activity reflects “the equation has changed,” adding more complexity.

4. Structural Forces: A Shrinking Public Market and Squeezed Returns

Timestamps: 11:07 – 14:54

• Stagnant IPO Market: Lack of public market appetite for older, less dynamic, and more leveraged PE-owned companies.

• Public vs. Private: High leverage and longer hold periods make private equity companies less attractive to the public markets.

  “Private equity owned companies are more leveraged… so when you take them to go public, they’re rightly received skeptically.”
  (Antoine Gara, 13:31)

• Market Implications: The overall stock market is shrinking, with more companies being de-listed and going private. This undermines the public market ecosystem and creates a feedback loop.

5. Valuation Gaps (“Expectations Gap”) and Industry Reckoning

Timestamps: 14:54 – 16:00

• Persistent Valuation Gap: PE firms won’t sell unless they get their desired price, while public market investors remain skeptical. Optimism for a reopening of the exit pipeline keeps getting deferred.

  “It’s always just around the corner. What actually breaks this constipation…?”
  (Katie Martin, 15:46)

• Imminent Shakeout: Investors are stopping new commitments ("until the cigar box gets refilled"), forcing firms to crystallize and realize potentially disappointing valuations.

6. Has the Golden Era of Double-Digit Returns Ended?

Timestamps: 17:09 – 18:56

• Return Compression:

  “20% a year compound rate of return is not happening anymore … the industry is going to figure it out.”
  (Robert Armstrong, 17:09)

• Interest Rate Regime: The largest recent investment flows happened at ultra-low rates, which have since reversed, stranding assets at inflated purchase prices and hampering exit values.

  “They’re holding onto this record sum of… trillions of dollars that were invested at the absolute wrong time.”
  (Antoine Gara, 18:04)

7. Retail Investors: New Targets or ‘Naïve’ Buyers?

Timestamps: 18:56 – 20:11

• Democratization of PE: With professional outlets drying up, PE is “democratizing” by pushing products toward retail investors and retirement plans.

  “Is it too cynical to wonder whether the industry is looking for naïf buyers of this stuff because they can’t find any other way out?”
  (Katie Martin, 18:56)

• Disadvantages for Retail: Newer funds are “evergreen,” lacking the defined-return structure that “was the beauty of the industry.”

  “You’re going to be relying on a lot of subjective judgments like valuations and sort of the marks that we all are skeptical of sometimes.”
  (Antoine Gara, 19:47)

Notable Quotes & Memorable Moments

• “Private equity is a bit bunged up… the fairy tale… is that they buy unloved, lowly companies, fix them up into shiny, amazing companies … and then list them… Ka Ching. Money rains from the sky.”
  (Katie Martin, 00:18)

• “The person who’s setting the construct up is the private equity firm. They hold all of the information, they have the power here.”
  (Antoine Gara, 07:54)

• “I don’t understand… How can it be hard to sell a business at a good valuation now when everything on the stock market is selling for a gajillion times earnings?”
  (Robert Armstrong, 11:07)

Key Timestamps

• 02:23 – Antoine explains what private equity is, how funds work
• 03:38 – The ingredients for outsized PE returns
• 05:44 – The critical importance of exits
• 06:50 – PE selling David Lloyd Gyms… to itself
• 09:02 – Explanation of secondaries/continuation funds
• 11:57 – The age of companies at IPO has dramatically increased
• 13:11 – PE ownership shrinking public markets
• 17:09 – Has the era of 20% returns ended?
• 18:56 – Why retail investors should be wary of the “democratization” of PE

Closing Segment: Long/Short

Timestamps: 21:01 – 22:59
A lighter segment where the hosts and guest go "long" (in favor) or "short" (against) various people, trends, or ideas:

• Rob Armstrong: Long Robert Redford, short dressing like Robert Redford
• Katie Martin: Long Mario Draghi (urges Europe to listen to him on competitiveness)
• Antoine Gara: Long well-paid advisory firms; “The investment bankers always win.”

Episode Takeaways

• The private equity model is under strain, as traditional exit routes (public markets, trade buyers) are blocked or less lucrative; assets are increasingly recycled amongst funds.
• Returns for investors may fall, as the easy gains of earlier decades are eroded by greater competition, higher interest rates, and more mature assets.
• Retail investors pose new risks, both for themselves (as targets of complex, illiquid products) and for the system, as the PE industry seeks new capital and exit opportunities.
• Despite the churn, enablers (advisory firms) continue to prosper.

Summary prepared for those seeking a deep understanding of the episode’s key arguments and tone, with speaker attributions and timestamps throughout.