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Buyout groups assess challenge of selling trillions of dollars worth of companies so they can return cash to investors

Private equity executives have warned that their industry faces the prospect of years of lower returns as they seek to sell assets following a frenzy of investments during the coronavirus pandemic.

After booming in recent years and raising record hauls of cash, buyout groups face a challenge in exiting from trillions of dollars worth of unsold companies. Many of those deals were agreed during the 2021 to 2022 window of low interest rates and buoyant markets.

“During that period of time rates were low and valuations were high,” Pete Stavros, KKR’s co-head of global private equity, told the SuperReturn industry conference in Berlin, echoing many other executives at the event.

“These are going to be tough vintages . . . they’re probably going to underperform.”

Funds face a challenge to sell off more than $3tn worth of companies they own in order to return capital to their institutional backers, which include the likes of pension, sovereign wealth and endowment funds

Apollo co-president Scott Kleinman likened the issue facing the industry to a “pig” in a “python” and warned that buyout groups would need to endure a few years of lower returns.

A further challenge is that alongside their existing investment portfolios, fund managers have $3.9tn of so-called dry powder or unspent capital to invest in new deals, according to a mid-year industry report from consultancy Bain & Co.

Executives said the industry would have to adapt, with a greater emphasis on finding deals where funds can make operational or strategic improvements to produce profits.

That includes focusing on deals such as carving out divisions from companies or investing in businesses still owned by their founders.

“For the past 10 it was too easy, almost, to generate returns,” Marc Nachmann, global head of asset and wealth management at Goldman Sachs, told the conference.

The industry’s model of paying high prices for companies using cheap debt before selling them just a few years later at a higher price ratio “won’t work in the following 10 years”, he said.

The slow pace of a nascent rebound in deals has also delayed returns. Dealmakers have had difficulty reaching agreement on valuations for their assets, an issue beginning to ease as inflation and the economic outlook stabilise.

While private equity-backed sales are on track to rise 17 per cent this year to $361bn, that would still be the second-worst year for such exits since 2016.

“There has been a bottoming out. What there hasn’t yet been is what we’d call a massive recovery,” said Rebecca Burack, global head of Bain & Co’s private equity practice.

Although investors cautioned on the performance of recent funds, they said there were still opportunities in the market.

Harvey Schwartz, chief executive of Carlyle, said that while rising borrowing costs “might create some challenges for people during the transition, it is a much healthier environment”.

Schwartz said he saw potential for investment outside the US in markets such as Japan — where his group is seeking to buy the local operations of KFC — and in Europe.

“Over the next five or 10 years we’ll be able to see extraordinary opportunities in Europe. But that would be an out of consensus opinion,” he said.

Mercedes-Benz, aiming to introduce next-generation solid state batteries into its electric vehicles by 2026, said it has moved into advanced tests of a battery developed by Massachusetts-based Factorial Energy. The move comes amid increasing industry and investor skepticism about the mass-market potential of most next-gen EV batteries.

In the most recent sign of industry turmoil, Ionic Materials, another startup solid-state battery maker, on Tuesday let go all of its staff and closed its doors, as we reported. Sherwood Partners, a California-based receivership firm, this week began selling off Ionic’s intellectual property, laboratory equipment and other assets, according to a former Ionic employee. Sherwood and Ionic did not respond to emails.

Many in the EV industry have seen solid state batteries as a sort of holy grail propulsion system for EVs because they theoretically could deliver about 500 miles of driving range, charge fast, cost less than conventional lithium-ion batteries, and pose a lower fire risk because they eliminate flammable liquid as the electrolyte. But commercial solid state batteries seem unlikely to be ready until late this decade, and they are threatened by the improving performance and lower cost of conventional EV batteries. As we have written, as long as current “good enough” batteries deliver satisfactory performance, most automakers are unlikely to risk commercializing an untried technology such as solid state, even if such batteries might work better. The solid state players also face competition from next-gen silicon anode makers such as Sila Nanotechnologies and Enevate, which are in or near commercial EV production and deliver similar energy density and driving range as solid state designs.

Factorial CEO Siyu Huang told me she hopes the company’s batteries are in commercial EVs in 2027 or 2028. On Wednesday, Factorial said it had shipped “B Samples” of its 106 ampere-hour battery—20 times the charge capacity of a smartphone battery—to Mercedes. Few experimental batteries such as Factorial’s reach B Samples, which means its batteries have passed Mercedes’ lab tests and are ready to be tailored for the automaker’s qualification vehicles, where they will face around 18 months of further punishing tests. If they pass muster, Mercedes could ask Factorial for “C Sample” versions of its battery, which would be tailored yet again to fit a specific EV.

Factorial also has batteries in the earlier A Sample stage with Stellantis, with which it has a joint development agreement. At a conference last year, Stellantis CEO Carlos Tavares highlighted the automaker’s work with Factorial, and suggested the carmaker would have a solid state battery powering an EV in 2026. Mercedes and Stellantis led Factorial’s $200 million Series D funding in 2022.

Huang, the Factorial CEO, argued that solid state batteries using lithium metal will compete well with conventional batteries because they allow EV makers to reduce the weight of the vehicles by up to 30%. Greater energy density means Factorial’s batteries can be smaller and lighter than conventional EV batteries, allowing EV designers to eliminate supporting steel and aluminum framing in the vehicle itself, she said. “That’s a huge amount of cost reduction,” she said.

In April, SES AI—which like Factorial uses lithium metal as the anode, but employs a liquid electrolyte—moved into the B Sample stage with Hyundai Motor, as we reported, putting it arguably ahead of Factorial. Another Factorial rival, California lithium-metal battery developer QuantumScape, has said it hopes to move into B Samples with undisclosed customers later this year.

Promotion for French billionaire’s second-youngest child follows his appointment as head of watches unit

French billionaire Bernard Arnault has appointed his son Frédéric as head of one of the family holding companies controlling LVMH, the latest in a series of promotions for the 29-year-old scion within the world’s largest luxury group.

The fourth of Arnault’s five children, Frédéric will replace Nicolas Bazire as managing director of Financière Agache, the company said on Thursday. The Arnault family owns 48 per cent of LVMH’s capital and 64 per cent of its voting rights. The Paris-listed group owns brands including Louis Vuitton, Dior and US jeweller Tiffany.

A graduate of top engineering school Ecole Polytechnique like his father, Frédéric was recently named chief executive of LVMH Watches, after a stint as chief executive of Swiss watchmaker TAG Heuer. He and his 32-year-old brother Alexandre were appointed to the LVMH board in April, joining older siblings Delphine and Antoine. Shares rose 1.34 per cent on Thursday, giving LVMH a market value of €381.46bn.

All changes in the roles of the five Arnault children, who all have roles within the LVMH, are scrutinised for signs of who might one day succeed the group’s 75-year-old patriarch.

Bernard Arnault has insisted that he has no intention of stepping back any time soon however, and the group two years ago increased the age limit for the chief executive role at LVMH to 80. But the French billionaire is carefully laying the groundwork for succession at the company by placing his children in key positions — a process that has increased in pace since the start of 2023. He recently reshuffled his top external managers in order to set up a generational handoff among senior executives that work alongside the family.

Delphine Arnault, 49, was appointed chief executive of Dior — the group’s second-biggest brand by sales after Louis Vuitton — at the start of 2023, and sits on LVMH’s executive committee.

Antoine, 47, is in charge of image and sustainability at the group, and was also named chief executive of Christian Dior SE — another family holding company above LVMH — at the end of 2022.

Alexandre is a senior executive at jeweller Tiffany & Co, which LVMH acquired for about $16bn in 2020. Jean, 25, runs watchmaking at Louis Vuitton.

Outside the family, the group’s managing director Antonio Belloni, 69, stepped down after 23 years as Bernard Arnault’s right hand in April, replaced by Stéphane Bianchi, formerly LVMH’s head of watches and jewellery, who is a veteran of family succession at French cosmetics group Yves Rocher.

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