Scott Kleinman, Co-President of Apollo Global Management Inc., indicated that private equity firms must begin to "capitulate on valuations" for assets, following the normalization of borrowing costs after a period of easy money. He observed that the industry "lost its way a little bit" when interest rates were near zero, leading firms to pay increasingly high prices for assets without sufficient regard for future exit valuations. Kleinman emphasized that while capital is available for exits, the valuations offered may not be favorable, leaving firms that paid a high price in a difficult position.
Kleinman explained that the "pig" of overvalued assets acquired during a decade of 0% interest rates is slowly moving through the "python" of the market. He noted that the inventory of private equity-owned companies remains very high, and it is challenging to exit these companies at the valuations sponsors desire. This has resulted in extended hold periods, negatively impacting internal rates of return (IRRs) for vintages between 2017 and 2022. He highlighted that Apollo, having maintained valuation discipline, has been active in selling and exiting companies.
The Apollo Co-President clarified that the current challenge is not a lack of capital for exits, but rather the reluctance of sellers to accept lower valuations. He stated that if a reasonable price was paid initially, exits are possible, but those who paid a high price are effectively "stuck." Kleinman predicted that the passage of time, with companies generating cash flow and paying down debt, will eventually lead to target valuations. However, he foresees a period of adjustment for the industry, potentially leading to smaller funds and some firms ceasing operations, describing it as a "shrinking of... the expansion of private equity firms."
