Scott Kleinman, Co-President of Apollo Global Management, believes that private equity firms will need to "start capitulating for sure on valuations" due to the shift from an era of easy money and low interest rates. He noted that the industry had "lost its way a little bit" when 0% interest rates allowed sponsors to go on a buying spree, paying increasingly high prices for assets without much concern for valuation. This has led to a significant inventory of private equity-owned companies that are difficult to exit at desired valuations.
Kleinman emphasized that while capital is available for exits, the valuations may not be appealing. He likened the current situation to a "pig making its way through the python," suggesting that the industry is still in a digestion period following the extensive buying spree. This sentiment has been echoed by others, with one banker reportedly commenting that something about private equity is "broken" given the robust public markets and strategic M&A activity.
John Zito, another Apollo executive, also questioned private equity software valuations, stating that "all the marks are wrong." He warned that lenders to smaller software companies could recover as little as 20% to 40% on the dollar, implying substantial losses. Zito specifically highlighted software companies taken private between 2018 and 2022 as particularly exposed due to high valuations and low interest rates during that period, and many being of "lower quality" than larger public competitors. Apollo, however, stated that software companies constitute less than 2% of its assets under management and it has no private equity stakes in software firms.
Despite the challenges, Kleinman believes that the broad private credit asset class will endure. He contrasted Apollo's disciplined approach to valuation, stating the firm avoided sectors like software and has been active in selling companies. However, recent academic research suggests that Apollo-backed companies pay approximately one percentage point more to borrow in the leveraged loan market, a "sponsor premium" reflecting concerns about Apollo's aggressive approach in creditor negotiations, as seen in the 2015 Caesars Entertainment bankruptcy. Apollo has disputed these findings, asserting its portfolio companies secure competitive rates.
