Mixed outlook drags down sentiment indicators for private equity's Big 4

Expectations for improved private equity dealmaking and fundraising before the close of the year are building among the four largest listed alternative asset managers even as executives describe slower growth and persistent high interest rates as long-term challenges for the asset class.

That mixed outlook contributed to a decline in the average net positivity score in the second quarter for Apollo Global Management Inc., Blackstone Inc., The Carlyle Group Inc. and KKR & Co. Inc., the largest among their peers by private equity assets under management.

The tone of their second-quarter calls was not only less optimistic compared with the previous quarter; transcript sentiment scores for the Big Four fell below the second-quarter average for S&P 500 firms, according to an S&P Global Market Intelligence analysis of the language used by analysts and executives on the calls.

"There's been a marked improvement in sentiment, and I think we can be more optimistic about deal activity going forward. But I'd say the market still feels fragile," Carlyle CEO Harvey Schwartz said on the firm's second-quarter earnings call. "CEO confidence is improving. But we've had a major shift, obviously, in the cost of capital."

Higher interest rates make debt-heavy private equity deals more expensive. It was one in a trio of factors, alongside slower economic growth and backpedaling on globalization, that prompted Apollo CEO Marc Rowan to declare "the end of an era" for private equity when his firm reported second-quarter earnings.

Private credit inflows boost AUM

The large alternative asset managers are much more than their private equity strategies, and headwinds for private equity can play as tailwinds for other segments of their businesses. High interest rates boosted the outlook for the firms' private credit strategies, and tightened bank lending standards are opening new opportunities to deploy capital from those funds.

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"This is not a quarter that's a great time for private credit, this is a secular change. Not only do we have higher base rates and regulatory change and change in market dynamics, we are in the beginning of a secular shift in how credit is provided to businesses and a shift that I believe will continue to gather speed," Apollo's Rowan said.

Relatively strong private credit fundraising was a factor in continued AUM growth at the Big Four firms in the second quarter, a period during which Blackstone become the first alternative asset manager to achieve $1 trillion in AUM.

Carlyle returns lag market

Total return performance for three of the four largest listed alternative asset managers outpaced the S&P 500 through the first half of 2023, according to Market Intelligence data.

Only Carlyle lagged the S&P 500 at the end of the second quarter and remained behind the index on total return performance as of Aug. 10. While Apollo, Blackstone and KKR all reported year-over-year gains in both earnings and fee-related earnings in the second quarter, Carlyle trended in the opposite direction on both metrics.

Incoming Carlyle CFO John Redett, currently the firm's head of global financial services, tied the year-over-year decline in fee-related earnings to a rise in employee compensation.

"Modest growth in revenue was offset by continued investment into our people and teams," Redett explained on Carlyle's second-quarter earnings call.