SENNA

Buyout Firms Warned to Brace for Tougher Times Ahead

By Senna Wilson

Private equity firms must prepare for a period of lower returns as the era of easy gains comes to an end, warned Scott Sambur, a senior partner at Apollo Global Management.

Sambur's comments underscore the growing unease sweeping through the $5 trillion private equity industry as soaring inflation, rising interest rates and recessionary fears cloud the outlook. After years of stellar performance fueled by cheap debt and frothy markets, buyout firms are now grappling with a more challenging environment that could put their business models to the test.

"The days of easy private equity returns are over," Sambur told delegates at an industry conference in New York this week. "We're going to have to work a lot harder to generate the kind of returns that our investors have come to expect."

Apollo, one of the world's largest alternative asset managers with over $500 billion in assets, has already begun adjusting its playbook, according to Sambur. The firm is being more selective about the companies it targets for buyouts, focusing on sectors that are less vulnerable to economic headwinds.

"We're really scrutinizing deals much more carefully now," Sambur said. "We're looking for businesses that can withstand a recession, that have strong market positions and predictable cash flows."

Private equity's golden era was fueled by a combination of cheap financing, frothy valuations and the ability to juice returns through aggressive cost-cutting and financial engineering. But with interest rates climbing rapidly, that model is under strain.

"The tailwinds that private equity has enjoyed for the past decade are starting to shift," said Sarah Cone, a managing director at placement agent Eaton Partners. "Firms are going to have to work a lot harder to generate the kinds of returns that their investors have come to expect."

That could mean more focus on operational improvements, rather than financial engineering, as well as a greater emphasis on sectors that are less cyclical, such as healthcare and technology. It may also prompt some firms to get more creative, exploring alternative strategies like direct lending or venture capital.

"Private equity is going to have to evolve," Sambur said. "The easy money is gone, and firms are going to have to adapt to survive."