In this video the speaker explains why private equity (PE) matters to everyday consumers, noting that many familiar brands and even media outlets are owned by PE firms. He outlines how, over the past 18 months, public‑market sell‑offs have revealed large markdowns in private‑market valuations, citing Tiger Global’s 33% $23 billion write‑down and Instacart’s 76% drop from a $39 billion private round to an $8.6‑9.3 billion IPO valuation. The speaker connects these valuation pressures to rising interest rates, which make leveraged buyouts (LBOs) more expensive and have throttled deal flow. He then describes the record‑high “dry powder” pool—about $2.49 trillion globally—that sits idle awaiting deployment, and explains how fund managers feel pressure to invest it. Looking ahead to 2024, he highlights three converging forces: a massive wave of US debt maturing ($7.6 trillion) that could force higher rates unless the Fed eases, the uncertainty of an election year, and a potential 8‑month window (Q3‑Q4 2023 to Q2 2024) where rates may level or fall, possibly sparking a brief rally and renewed PE activity. The video ends with a disclaimer that it is not financial advice and a call‑to‑action for more PE‑focused content.
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Why should you even care about private equity? It's because private equity owns and controls pretty much every major brand that me and you interact with around the world. The 5 large media giants pretty much own every channel and station and news network that me and you watch. Half of the Las Vegas Strip, the MGM Grand, Bellagio, they're all owned by the same company. Very few of us realize how much private equity has their fingers in pretty much every industry. And when you think you're shopping at their competitor, you're really shopping at the same company. And in this video, we're gonna dive into the current state of private equity in the second half of 2023. Now, as a general overview, private equity goes and buys privately held businesses. They'll either buy a minority piece or sometimes they'll buy the entire business. For example, Sycamore Partners on Wall Street, they go out and they bought Staples, they bought Nine West Shoes, Aeropostale. Last year they were trying to buy Victoria's Secret and Kohl's Department Store. A lot of people don't realize a lot of the brands that we know and love are actually owned by private equity firms. Now, over the last 18 months, we've seen significant sell-offs in evaluations in the public markets, but we don't really know what's happening in the private markets because again, it is private. We only get sneak peeks on what the private equity firms report when they do what's called mark-to-market, or they mark down their portfolio. So when Tiger Global comes out and says we are marking down our portfolio by 33% and wiping away $23 billion in value, that is a huge indicator because it might actually be worse than that. Another example is Instacart's current IPO. They're actually going out and trying to sell stock right now between $26 and $28 a share. Now, if you look deeper into this article, in 2021, during a private round, which is traditionally led by private equity, they raised at a $39 billion evaluation. But if you scroll up a little bit, right now they are going to their IPO at an $8.6 to $9.3 billion evaluation. And if you do the math on that highest evaluation, that $9.3, that's a 76% markdown from their evaluation in 2021. But again, what we're seeing here is just the tip of the iceberg because this is what they report, like Tiger Global's report, or what happens when they go to public markets. Now because of these major markdowns, most companies have not gone to an IPO over the last 12 months. Because they are scared of what the market will actually pay, kind of like Instacart's evaluation here at a 76% discount. Now, these major markdowns coupled with rising interest rates have put a hold on the market to do deals. Now, as you may know, most of these private equity deals are done through a leveraged buyout or an LBO. An LBO allows a private equity firm to use a lot of debt to go and acquire these companies. So for example, if they're gonna acquire a billion-dollar company, maybe they would only put down $200 million billion and borrow the other $800 million to go and transact at a billion-dollar deal. The problem is interest rates have gone through the roof, taking away the purchasing power, or the cost of capital has increased for these leveraged buyouts, decreasing the amount of deal flow happening in the private equity markets. Cambridge Associates wrote about this here. They said weak economic activity, difficult political environments, and tight credit markets will pressure current valuations and slow investment and realized activity. While public equities quickly reflected these concerns in 2022, private markets reacted more slowly. And that's what we're seeing now, this trailing effect into 2023. But Cambridge Associates also give us an insight onto what to look forward to going into 2024. Right here it says, however, in 2023, we do not expect capital calls to pick up given GPs have near-record dry powder. Now, dry powder is a term that private equity uses for when they get commitments from investors into their fund, but they have not deployed that capital or called that capital So for example, me and you raise a billion-dollar fund, we actually don't receive that capital on day one. We leave that in our investors' wallets. When we're ready to do a $100 million deal, we'd maybe call down $40 million of capital from dry powder, and then we'd borrow $60 million from the bank of debt to do a $100 million deal, leaving us with $960 million of dry powder that we can deploy if we want. Now, when you don't do deals, fund managers feel pressure to do deals because they want want to deploy that dry powder. That's how they make money. And the last 12 months, there has not been a lot of deal activity, and dry powder has hit record highs. Now, according to S&P Global, dry powder from around the world has soared to a record $2.49 trillion. Yes, you read that right. That is money on the sidelines waiting to deploy into markets, and that does not include the amount of purchasing power they'd have if they coupled it with debt. Now looking forward into 2024, it makes an interesting story. We have records amount of dry powder that's waiting on the sidelines for more deal activity and/or interest rates to come down. Additionally, $7.6 trillion of US debt matures over the next 12 months into 2024. It's about a third of all US debt will have to be refinanced at higher rates unless those interest rates come down. This is why chief economists like you're seeing on this article here are saying the US government and the Fed will want to lower rates going into 2024. Otherwise, they're going to refinance this debt at a much, much higher rate. Additionally, 2024 is an election year that it's already heating up. During very hot and politically divided election years, typically markets are skittish, waiting to see who will win the presidential election to give them more certainty before they invest going forward. A number of fund managers that I've spoken to have said they do not plan to do a lot of deal activity in the second half of 2024. Which leaves a very interesting pocket right now from Q3 and Q4 of 2023 to the end of Q2 of 2024, about an 8-month window where interest rates may be leveling off or falling. A lot of the dry powder on the sidelines will want to be deployed into deals, and markets may rage back going into an election year because everyone tries to look good for an election year. This could spur on an interesting bull rally at the beginning of 2024. With all these things coming together. Again, this is not financial legal advice. If you guys want to learn more about how to build and launch a private equity fund, we've got more videos on our channel. So hit that like button or comment down below and let us know what types of videos you want in the future.
