Top Swiss Goldman Banker Laments Lack of Private Equity Deals

(Bloomberg) — Goldman Sachs Group Inc.’s most senior Swiss investment banker said private equity funds are increasingly retreating from auctions as they lack the power to compete with strategic buyers.

Fedor Schulten, a managing director at Goldman’s investment bank in Zurich, noted that the drop-out rate of private equity funds in sell-side processes remains “incredibly high,” he said at a conference of EuropaInstitut in Zurich.

“When we’re running sale processes, a lot of private equity funds show up, but then the dropout rate still remains incredibly high,” Schulten said. With rising interest rates and an increasing cost of capital, company valuations will decrease, he added, “that’s going to make it even harder for them to monetize assets.”

Many buyout firms are stuck holding investments they bought up during the pandemic, when valuations were high and capital was being raised at record levels.

Often, they’ve been unwilling to offload these stakes at a discount. At the same time, private equity backers, known as limited partners, have been reluctant to pump more money into the asset class due to a lack of distributions. That’s made it harder for firms to compete with strategic buyers, or corporates, many of which have reaped the benefits of record stock markets and buoyant earnings.

A wait-and-see approach from firms may not prove beneficial in light of rising interest rates across the world, according to Schulten.

“The longer we wait the worse the environment will be,” Schulten said.

Global merger-and-acquisitions volumes surpassed $2.1 trillion in the first eight months of the year, according to Boston Consulting Group, an all-time high driven by mega deals between corporates. In Switzerland specifically, private equity deals accounted for less than a fifth of all deals during that period, the second-lowest total in the past eight years, BCG has said.

With funds struggling to monetize investments, the private equity industry has adopted an array of tools to wring cash out of portfolio companies for limited partners, including flipping assets into new continuation funds.

“You need to be super, super careful with these continuation vehicles because at some point someone is going to have to eat the pain,” Schulten said.

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