‘Private equity is now king for the ultra-rich,’ says Tiger 21, an exclusive club of investors.


  • Founder and Chairman Michael Sonnenfeldt told CNBC that Tiger 21 members, who collectively manage about $150 billion of assets, have tripled their allocation to private equity over the past decade.
  • “Private equity is king now – that’s where businesses are still growing,” Sonnenfelt said.
  • But not everyone agrees that optimism is justified. Dan Rasmussen of Verdad Advisors said the industry is facing a “perfect storm” given the sharp rise in interest rates and falling valuations.

Michael Sonnenfelt, Tiger 21

Scott Millin | cnbc

Private equity is currently “king” among the members of Tiger 21 – a network of ultra-high net worth entrepreneurs and investors – according to its founder and chairman, Michael Sonnenfeldt.

2022 was particularly tough for the private equity industry after a decade-long boom, but it has been bullish so far this year.

Sonnenfeldt told CNBC on Friday that Tiger 21 members, who collectively manage about $150 billion in assets, have tripled their allocation to private equity over the past decade, and are increasing their exposure to AI and climate. The companies see opportunities ahead amid the expected boom.

Most of the members of Tiger 21 are entrepreneurs who have sold their companies and are now in the business of wealth preservation.

“The cash stake is around 12%, they have cut down on public equities, but our real estate is down a year or two now because of rising interest rates, and private equity is king now – that’s where the business is still. are increasing,” Sonnenfelt said.

“Of course, the availability of credit makes it a little more difficult, but private equity is where our members really focus because when you have foundational businesses that are growing rapidly, they tend to outperform the market. can do.”

Sonnenfelt revealed that the percentage of private equity in members’ portfolios has increased from 10% to 30% over the past decade, with venture capital making up a larger share than ever before.

“Many of our members have seen AI is a big opportunity, climate is a big opportunity and obviously the energy markets have performed well, so our members really think that will drive fundamental growth over the long term.” Added.

According to a quarterly report from EY, private equity activity in the second quarter of 2023 increased by 15% compared to the first quarter, with total deal value reaching $114 billion due to heavy growth in Europe.

But not everyone agrees that 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” in the wake of a sharp rise in interest rates and a decline in tech valuations.

He said, “There are three big problems facing private equity. The first is that most private equity is leveraged – about 60% of enterprise value for the average buyout is net debt – and almost all debt is floating rate.”

As interest rates have increased dramatically, the average interest costs for private equity firms have increased. The average interest cost as a percentage of EBITDA (earnings before interest, taxes, depreciation and amortization) in the private equity and venture capital industry was 43% in 2022, while the average among companies on the S&P 500 index was 7%, according to Verdad. Consultant.

Rasmussen said, “The other problem is that private equity is exposed to more than 40% of the technology sector, technology valuations are falling, and so as you see multiples coming down, it creates an additional problem. Used to be.”

Cumulatively, this means that the private equity industry is buying companies at premium valuations with higher levels of debt than in the public markets.

While some big tech companies with significant investments in AI have seen valuations surge this year, pushing up the average for the broader sector, smaller companies with higher leverage have generally not seen the same gains.

The US Federal Reserve has increased interest rates by more than 500 basis points over the past 18 months, from a target range of 0.25-0.5% in March 2022 to 5.25-5.5% in July.

Although the Federal Open Market Committee opted to pause its rate hike cycle this month, the central bank has suggested that rates will remain high for a longer period of time, keeping highly leveraged parts of the market typically targeting faster growth. is negative for.

“From a quantitative perspective, the fundamentals of sponsor-backed companies look dire,” Rasmussen said in a research note earlier this year.

“Yet private equity remains the darling asset class of sophisticated investors, with many endowments and family offices accounting for close to 40% allocation. Given such a high level of enthusiasm, the financial fundamentals look far less attractive than expected.”

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