KKR's Alisa Wood Talks Private Equity

Private equity

• Alisa Wood · KKR

  Private equity portfolios bought at 2021-22 peak valuations will face pressure from refinancing and fundraising, and this will come to a head.

  Wood says about 32,000 companies, roughly $4 trillion of value, are owned by private equity, and much of it was bought in 2021 and 2022, when over half of deal flow was software and rates were much lower. Many deals were struck at peak valuations, so owners are trying to grow into those values instead of selling at a loss. She argues this will come to a head because the capital structures must mature. Owners will have to refinance, and managers need to raise new money and return capital to lift DPI. Waiting is not a viable industry strategy. She gives no timeline.

  “...but part of it is those capital structures are gonna have to mature. You're gonna have to refinance, and you also need to go out and raise money again if you're a manager.”at 3:35

• Alisa Wood · KKR

  Private equity manager return dispersion is the widest ever, with a day of reckoning and possible consolidation ahead.

  Wood says the k-shaped dispersion of private equity returns is the widest it has ever been. Her latest figure is about 1,400 basis points between the best and worst managers, against about 300 basis points in public equities. She says the industry is in a k-shape, where the top group is doing well and the rest find it very hard. She expects a 'day of reckoning' in which owners must decide what to do with weak businesses, and consolidation is a likely part of the answer. She says a mix of outcomes is probably the answer.

  “The happy part of the k, life's good... the dispersion of return across managers is the widest it's ever been... about 1,400 basis points between the best managers and the worst. In public equities, it's 300 basis points.”at 4:00

• Alisa Wood · KKR

  Private equity fund count keeps rising, and only large managers with scale, breadth and depth will outperform.

  Wood says the number of private equity funds is still growing rather than shrinking, which she thinks is the wrong direction. She argues that managers are not equal. Winners have scale, breadth and depth, and KKR has about seven supporting professionals for each investment professional. She rejects the idea that small managers can outperform on alpha. Small managers struggle to fund the resources needed to create value. Large managers have alignment because they are the largest investor in their own funds, which is needed when beta-style returns no longer work. She also argues that portfolio-level alpha, such as pacing, diversification and cash-flow optimisation, matters more now.

  “I think there are even more funds. We haven't seen that shrinking yet... The managers who do well are the ones that have scale, have breadth, have depth.”at 4:42

• Alisa Wood · KKR

  Private equity returns now depend on earnings growth rather than cheap leverage, lower valuations or multiple expansion.

  Wood says that 10 to 20 years ago, private equity returns came mainly from cheap leverage, lower valuations and multiple expansion. That is no longer the case. Managers now need earnings growth, and to generate it they need more resources than before. This is her explanation for why scale and operational support are now necessary.

  “Fifteen years ago, twenty years ago, you used to rely on cheap leverage. You used to rely on lower valuations. You used to rely on multiple expansion. That's what drove the majority of returns.”at 5:34