[andrewcamel]

Vintage 2020-2024+ are going to be some of the worst for PE, after a 40 year bull run driven by rates going from 20% in 1981 to 0% in 2021. Now there's too much capital in the hands of people who have been trained for years that to be successful, all they need to do is deploy capital, without a real understanding of the underlying business. Just ask experienced operators if their PE board members know what they're doing; I'd venture to guess the vast majority would respond negatively. It will take a few years for this excess cash to get washed out, and then you'll have a longer-term washout of all these people who have spent years refining their skills to be good at capital deployment, not to return capital in a differentiated way (per Bain stat on 5% driven by profit). For so many years, the business has basically been "show up, be a reliable soldier / good politician, know how to deploy capital, and you'll get promoted and make a bunch of money". It's hard to see how that will remain the case, particularly as the LP return expectations go up transitioning from a positive sum environment to a zero sum environment.

It feels like we're in the middle of a "back to basics" moment. Funds will need to figure out ways to develop true operating advantages, but not in just a performative way like most have done in the last 20 years. Now it will really count. There are a small set of funds who are true experts, spend management fees on teams of experts that are constantly involved to support management (not just an outsourced recruiting team, a bench of "advisors" with nice brand names, or a Bain team on retainer, but truly know how to operate all aspects of a business). And the exciting thing is that there are people who do this well, consistently. I.e., it is possible with the right team and execution. And there is a particularly interesting opportunity right now in that so many businesses are PE-owned and poorly managed, for those who know what they're doing. Lot of things that worked before in a low/zero cost of capital environment will now break and create forced sellers.

Reality here likely ends up being far more complex / unpredictable, but directionally this feels accurate.

[dehrmann]

Much of this also applies to VC.