We’ve written off and on over the years about the code of omerta surrounding private equity investing. The fund managers, aka “general partners” had managed to so cow the investors, aka “limited partners” as to how only the privileged were admitted to the special club of fund investors, that they bought into an inversion of the normal rules in money-land: that the party with the gold, here the limited partners, makes the rules (or at least has a lot of say). Not only did these investors accept non-negotiable agreements1 with egregiously one-sided terms, but they also accepted not known how much in fees and expenses they were being charged and not having independent valuations (which is considered to be fundamental for every other type of investment made by fiduciaries). And they also agreed to treating the contracts as trade secrets, when there was nothing “trade secret” about them, and refrained from saying bad things about particular general partners or the industry generally, lest they no longer be afforded the opportunity to invest.
But the cognitive capture and the code of omerta are finally cracking. As the long-term slide in private equity returns has accelerated, and the industry has (not surprisingly) resorted to chicanery to try to keep milking investors, some big players are now willing to burn their bridges and call out industry misconduct in blunt terms. The example is a Financial Times front page story, Private equity’s best days are over, says Egyptian billionaire Nassef Sawiris, where the headline is tame compared to Sawiris’ criticisms.
But before turning to Sawiris’ critique, some backstory as to why it matters.
The reason to care about private equity is its outsized power and the damage it has done and is set to continue to inflict, not just upon employees and customers of private-equity owned companies, but as we’ll see, increasingly upon its investors. That includes public pension funds, who have accounted for an estimated 30% to 35% of total private equity commitments. Keep in mind that many of these public pension funds, such as CalPERS and the Kentucky Public Pensions Authority, have government guarantees of pension obligations, meaning taxpayers are on the hook if fund investment performance falls short.
As for their raw power, consider: private equity has for decades been the largest source of fees to Wall Street and top white shoe law firms. Contacts inform me that private equity has also provided more than half the professional fees to McKinsey, Bain and BCG since the early 2000s. In its pre-crisis IPO filing, KKR stated that was the fifth biggest employer in the US via the companies it owned.
The private equity fund managers are also unduly influential via succeeding in targeting niches (which may be geographic and thus don’t show up in usual antitrust surveys) where they can achieve pricing power. One is hospital billing, where two private equity owned companies, TeamHealth (Blackstone) and Envision (KKR) are singularly responsible for the big uptick in “surprise billing” abuses.
One might wonder why it has taken investors so long to escape private equity cult programming. The industry, in its very early years as “leveraged buyouts” in the 1980s, earned spectacular returns. Finding overdiversified conglomerates and selling them for more than the value of their parts was easy; the hard part was winning the takeover fight, particularly since Wall Street was not keen about siding against big corporations, who were lucrative clients. A LBO debt crisis (masked by the much bigger S&L crisis) of the early 1990s led to a fundraising drought, which meant that those who were able to buy corporations had little competition and generally got very good bargains. So a glory period of vintage 1995 to 1999 deals ensued, and private equity biz has been running on brand fumes for quite a while since then.
It’s not as if performance decayed quickly. But in the early 2000s, the money going into private equity rose markedly, the result of Greenspan in the dot-bomb era forcing negative real yields for an unheard of 9 quarters, which led investors into all sorts of reckless reaching for returns (like the subprime and asset-backed CDO bubbles). Historically, private equity was expected to deliver 300 basis points over stock indexes in returns to compensate for its higher risks (leverage and illiquidity). Mind you, no corrections were made for known problems, like private equity firms not reducing valuations sufficiently in bear equity markets (when by all logic, leveraged equity should be worth less than companies with lower borrowing levels) or adjusting for private equity reporting returns on average a quarter later than for listed stocks. The latter created an illusion of lower correlation with equities, which is valuable from a risk-reduction perspective. Recent papers that have corrected the timing of reporting have found, natch, a high level of correlation between public and private equity returns.
To shorten a very long story, Oxford Business School professor Ludovic Phalippou ascertained that private equity stopped outperforming public stocks in 2006. That means it should have been shunned as an investments, since it was no longer producing enough to compensate for its additional risks. To the extent private equity was delivering outsized total performance, the excess was being scraped off by the general partners in fees and expenses. Yet investors, particularly in the post-financial-crisis ZIRP era were desperate for additional returns, held fast to private equity hopium. They justified the flagging results with gimmicks like lowering the required risk premium from 300 basis points to 150, and switching the underlying equity benchmarks to be more flattering.
The chickens have come home to roost as private equity, as levered equity, has fared poorly in a higher (and not even all that high!) interest rate environment on top of its pushing-two-decades of widely unacknowledged underperformance. And unless Trump unexpectedly makes a big change in his economic course, private equity is set to suffer even more in a stagflationary environment (or worse, a flat out depression).
A collection of recent Financial Times headlines should give an idea of the sorry conditions in the industy:
Private equity’s bind should prompt an investor rethink
3 days ago — Private equity’s bind should prompt an investor rethink. Returns are likely to be lower in a world of weaker growth, higher interest rates …Private equity goes ‘risk off’ as it pauses dealmaking
Apr 15, 2025 — Donald Trump’s tariffs are forcing private equity groups to pause their dealmaking and focus on managing their existing portfolio companies, …Big investors look to sell out of private equity after market rout
Apr 6, 2025 — The race to find liquidity signals that investors in private equity funds increasingly expect to receive few cash profits from their holdings …Hedge funds > private equity
4 days ago — After all, whenever private equity buys and sell companies, takes them public or issues bonds and loans to finance them it generates hefty fees …Private equity industry shrinks for the first time in decades
Mar 4, 2025 BE — Private equity fundraising dropped 23 per cent in 2024, with the industry drawing in $401bn in new assets — the weakest tally since 2020.Pensions dim on US private equity
Apr 14, 2025 — CPPIB’s trepidation over investing in the US, in particular, is a huge blow to the private equity sector. The fund had close to $50bn of …Can private equity meet public responsibilities? – FT Forums
To say that opinions on private equity’s sustainability record are divided would be a wild understatement. When we polled FT Moral Money readers, respondents …
And no, I did not omit any cheery search results.
A good one-stop shopping account of why once-loyal private equity investors are trapped in dud deals came in Big investors look to sell out of private equity after market rout. Keep in mind that CalPERS a few years ago acknowledged that private equity would go from being a cash flow positive investment strategy (CalPERS could expect to get more in redemptions than it put in in a typical year) to cash flow negative. Why CalPERS insisted on increasing its private equity allocation in the face of that knowledge is beyond me. Pensions do not pay out beneficiaries based on paper returns. They pay them out of cash on hand.
The pink paper explained that the cash bind has only gotten worse:
Large institutional investors are studying options to shed stakes in illiquid private equity funds after the rout in global financial markets pummelled their portfolios, according to top private capital advisers.
The calls by pensions and endowments seeking ways to exit their investments, probably at discounts to their stated value, are a bad sign for the $4tn buyout industry. Industry groups such as Blackstone, KKR and Carlyle all saw their stocks plunge between 15 per cent and more than 20 per cent on Thursday and Friday.
The race to find liquidity signals that investors in private equity funds increasingly expect to receive few cash profits from their holdings this year and may face liquidity pressures that cause them to further retrench from making new investments. Last year, the private equity industry’s assets dropped for the first time in decades, according to Bain & Co, as fundraising plunged 23 per cent from 2023.
Executives had expected that a revival of dealmaking and initial public offerings under US President Donald Trump’s administration would help firms return profits to their investors, bolstering a spurt of new investment activity. But the opposite has happened, leaving the private equity industry in one of its most vulnerable states ever….
“The amount of calls I’ve received from limited partners seeking liquidity in the past few days is the most since the first days of Covid,” said Matthew Swain, head of Direct Placements and Secondaries at Houlihan Lokey. “People were banking on IPOs to meet their liquidity needs and now need to raise cash just to meet capital calls.”
The “meeting capital calls” point is more pernicious than it seems. Those demands are coming from the very same private equity funds that are not selling investee companies on anything like the usual timetable. But most institutional investors have made commitments to current “flagship” (as in major) funds by big players. If those commitments have not been fully deployed, the general partner can make a capital call to make a new company buy and the fund investors have 5 to 10 days to get the money in. If they fail, their entire investment in that fund can be seized and allocated to the other investors in the fund.
Now finally, to the pointed takedown by billionaire Nassef Sawiris, as told to the Financial Times:
Sawiris, who has invested parts of his fortune in funds at multiple buyout firms, said he and others who back private equity funds were frustrated with the lack of distributions in recent years. Firms have struggled to exit investments amid a post-pandemic slowdown in dealmaking and initial public offerings….
“[Investors] are so frustrated. They are telling them [buyout firms]: ‘I haven’t seen any returns, you haven’t returned any cash to me in the last five, six years’.”
Sawiris took particular aim at the use of “continuation funds” to recycle capital — a tactic whereby private equity groups, instead of selling an asset to another owner or publicly listing it, move the asset into a new fund where they still maintain control.
“Continuation funds is the biggest scam ever because you say ‘I cannot sell the business, I’m going to lever it again’,” Sawiris said.
Continuation vehicles have grown increasingly popular in recent years, surging about 50 per cent to hit a record $76bn last year, according to a report from investment bank Houlihan Lokey….
He also criticised private equity managers’ priorities, saying they were far more focused on raising capital for their investment vehicles than their portfolio companies’ operational performance.
“They’re spending 90 per cent of their time fundraising and 10 per cent managing the businesses,” he said. “They attend board meetings, have a board dinner and there’s a reason why they didn’t execute the plan.”
Tellingly, Sawiris was breaking up his his Dutch-traded chemicals and fertiliser conglomerate OCI. He was lucky with many of his exits and returned a lot of cash to shareholders. He was considering using the remaining shell company with some cash retained to make new investments. He continued:
He said he was approached about buying dozens of companies…
Many of them were owned by private equity groups hoping for an exit, Sawiris said, adding that he did not find a single one of them to be an attractive target for a deal.
“A year ago we looked at 70 different companies that would have wanted to be merged with OCI because they were levered, and get a listing and all that . . . all private equity that can’t get an exit,” he said. “We said ‘like, why are we are there to solve somebody else’s problem’?”
So get this: not one had a company it could offer to a known-to-be sophisticated buyer on terms that made any sense. That suggests that any presentable and decently priced has long been sold, and what is left are dogs and zombies (companies that might be OK but are overburdened with debt, and the private equity manager won’t adjust his asking price to reflect that).
That suggests there’s no reason to expect the fundamentals to improve, even if Trump were to have a Damascene conversion tomorrow and drop his tariff demands. Yet wrong-way CalPERS decided in 2018 to increase its private equity allocation from 8% to 13% by 2021, and then in 2022 to boost the commitment from 13% to 17%. It has nearly met the 17% target. That “success” looks to be adding to private equity indigestion.
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1 Only a few terms at the margin are subject to ritualistic negotiation. Among other things, the limited partnership agreements contain astonishing indemnification language, including in the case of Bain deals, indemnifying the general partner for criminal conduct.
