Becker Private Equity & Business Podcast
Private Equity Exits and the Evolving Role of Family Offices with Matt Wolf of RSM 2-15-25
Sat, 15 Feb 2025
In this episode, recorded live, Matt Wolf, Healthcare Senior Analyst and National Healthcare Business Valuation Leader at RSM, joins Scott Becker to discuss the shifting exit environment in private equity.
Chapter 1: What is the current exit environment in private equity?
This is Scott Becker with the Becker Private Equity and Business Podcast. I'm thrilled today to be joined by Matt Wolf. Matt is one of our most listened to guests. He's a senior sort of leader in valuation at RSM. RSM is the leader in sort of mid-market private equity. We're going to talk today about the exit environment and sort of what's going on there. There's been this delay in exits.
We've seen some of the big, big fund companies report KKR and Carlyle Group, all cleaning up on fee income. But the reason their stocks took another chin after their earnings releases was the concept that they're actually not making a lot of money in that 20%, the profit on the exit. So the 2 and 20, the 2 is going great. They're also making money in a lot of other ways.
But the 20%, they're struggling because not enough exits. Matt, talk about exits, the family office environment, the general environment. Tell us what you're seeing out there.
Yeah, thanks, Scott. You know, the exit environment, we expect it to be very busy this year, we and others, right? You know, portfolio companies have been held for too long by most funds. We've seen, you know, NAV loans, continuation vehicles, other things like that sort of on the periphery.
But by and large, there's a significant amount of assets that we expect to be traded hands this year because the sponsors need to focus on new investments. And yeah, they're not... That 20% cut of the carry on exit, they've been holding out, hoping for multiples to return, for financing to get better, closer to what it was in 2021. It's just not going to happen.
So between the positions being long in the tooth and looming debt refinancings on a lot of these companies, we expect to see a high amount of turnover of these assets. But we expect that many of it will be at potentially lower multiples, right?
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Chapter 2: How are family offices influencing private equity exits?
A lot of these companies that were built or bought in the era of zero interest financing and now the kind of economics of those deals aren't really working. They're just not going to command the multiple that the sponsors need them to. But they have to get transacted again. They just have to be turned over. They got to return money to LPs, even if it's not at the IRR they want.
They got to focus on new funds. And, you know, one of the things that we're watching that I'm specifically watching is.
the role of family offices in those exits um you know it might be surprising to people for people to hear but there's estimates that family offices worldwide most of which are in the u.s have six trillion dollars of assets uh more than hedge funds and they have long investment horizons
So I'm curious to see and kind of expecting to see that we'll see a large uptick in family offices buying these portfolio companies from private equity groups that are looking to exit. They're going to have to exit a lower multiple. And if you're a family office that has a 7, 10 or even indefinite hold period, you know, this might look like a good deal on some of these actions, right? Yeah.
Chapter 3: What challenges are private equity firms facing?
Yeah, so there's so many pieces that you're talking about that are so fascinating. One is you see on private equity funds, so much of the success depends on the vintage. If you were in a vintage fund, we're in a period of escalating multiples. Everybody did well.
You almost had to just keep things even and use it well just through the arbitrage of multiples or stacking some stuff on and growing bigger EBITDA and having the multiple arbitrage. When multiple arbitrage goes away and there is none of that now, then you're in a spot where you're really between a rock and a hard place because margins have gotten tighter in some of these businesses.
So not necessarily outperforming and there's no multiple arbitrage. So I hear from plenty of LPs that, of course, we'll see this cycle is not doing nearly as well as the S&P during this cycle.
And then second, not really looking for the IRRs of what they wanted to get, but will be happy to get out of this with their capital intact and a little bit more money, some return, so that they're at least in the hunt to re-up and figure out where they're allocating their next set of funds.
In your point on hold periods, private equity funds famously five, seven years, venture capital funds a little bit longer than that. But the point is so right on that when you look at this, the family offices, many of them have a much longer hold to rise, particularly their cash generating businesses versus something like this where someone's really trying to flip it within five, seven years.
So really an interesting set of circumstances. Matt, any more thoughts there? What else do you see? What else are you hearing?
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Chapter 4: How do hold periods affect investment strategies?
Yeah, I mean, I think just another note on that hold period, right, is if, you know, I think it'll make the family offices in some cases, again, when it's a cash generating or near cash sharing business, they'll be much more competitive in this deal environment than a lot of traditional private equity sponsors.
If you plan to hold something over 10, 15 years, then you are generally much more willing to make investments in improvements and operations that might pay off over a longer period of time, but make sense to you as an investor that would help
you know kind of win deals away from other other private equity firms so i think you know historically family offices have been a little on the periphery of um sort of mid-market pe transactions and i think we'll we'll see them step a little more into the into the limelight here um so it'll be interesting to watch right and certainly every family office is different they have different strategies different goals of course but um it'd be interesting to see that
that wind away. I guess the other thing that we're also, of course, closely watching is we had a surprising CPI print yesterday, more sort of government confusion, uncertainty around tariffs, around policy choices, all of this that
Chapter 5: What trends are emerging in private equity valuations?
creates, you know, more uncertainty in the business decision making environment and adding taxes and sort of not like an actual IRS tax, but sort of a tax to making decisions, making investment decisions and allocating capital across capital markets. So, you know, that's something we watch.
pretty closely and markets pricing and less of a chance of you know fed rate reductions this year but and all of this uncertainty is sort of clouding the business environment increasing costs of making decisions and it's something we watch uh watch very closely well the point on the inflation print really ties into your earlier point because as private equity funds see less relief in interest rates they're more likely to say i better take this asset off the table and try and get rid of it
because I'm not necessarily gonna get the potential arbitrage that would have come with another 100 basis points reduction or 50 basis points reductions where capital actually got cheaper, financing got cheaper, and people were quicker to pay up for stuff. And then you're so right in that there was a period of time where financing was so cheap
The private equity funds outbid everybody on everything. Now you're getting to a spot where family offices and strategics sometimes could be in the game as well that aren't so reliant on low-cost financing. What a fascinating situation, Matt.
Yeah, and I guess just to clarify one of my earlier points, too, I completely agree. I'm not saying that tariffs are good or bad or that DOGE, the Government Accountability Efficiency Group, is good or bad. All I'm saying is that it's just creating a lot of uncertainty right now that I think is making it difficult. I know it's making it difficult for a lot of sponsors and management teams to plan.
But, you know, also... I think it can create opportunity for the right buyers as well. So I think we'll see that dynamic shift.
I mean, certainly in the healthcare sector, there's a report today that Doge sees $800 billion in cuts in healthcare. You know, obviously that just is... I think it's both unrealistic and it's also scary because if you're an investor in that sector, you just see a giant whoosh of dollars out of that sector. I don't think people think it's really going to happen anywhere near that extent.
And obviously, the president and Doge have to be quite careful not to do what they would do in business and aggressively cut costs, but throw us into a recession here because that's not going to play well either. So really a challenging set of circumstances. But as an investor in health care, when you see those potential cuts, that's a little bit scary. We'll see how it goes.
Absolutely. Maybe we can do a whole other episode on that. But, you know, it's like the financing, the government financing regulatory environment for health care is this sort of like patchwork.
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