Becker Private Equity & Business Podcast
Private Equity’s New Reality: Delayed Exits, Interest Rates, and Value Creation with Rick Kes of RSM 2-19-25
Wed, 19 Feb 2025
In this episode, Scott Becker speaks with Rick Kes, Partner at RSM, about the shifting landscape of private equity. They discuss the impact of delayed exits, rising interest rates, and how firms can create value in an environment where traditional growth levers are changing.
Chapter 1: What is the focus of the podcast discussion?
This is Scott Becker with the Becker Private Equity and Business Podcast. Thrilled today to visit with Rick Kess of RSM. RSM is the leader in sort of the middle market private equity consulting world. It's built an incredible franchise in terms of quality of earnings, valuations, all kinds of work advising buyers and sellers in the private equity world.
Rick, one of the things that's fascinating, and I know you can't comment specifically on companies, so I'll mention a couple companies, but we'll just use it as a tee-off point for the discussion. Both KKR and Kyle Lyle Group recently disclosed last quarter earnings. And what you're seeing in the private equity world is something that's fascinating.
You're seeing the big, big fund companies with higher and higher fees, but not enough profit from exits and delayed exits. So you're seeing sort of their stock price both took a little bit of a dive based on their results, even though they were great results, but they were driven by fees and lending results.
and and other kinds of fees from lending versus actual exits similarly kkr reported this weekend uh that they're making additional strategic investments in their strategic holdings category which is long-term buy and hold versus traditional buy build and sell what is your sense of what's going on in the private equity world and how much of a challenge is it that people are having trouble getting to the exit line on the last vintage of funds i guess that's a long
Chapter 2: What challenges are private equity firms facing with exits?
intro to the question of what do you see on these delayed exits and what should we expect yeah scott i think it's a fascinating question and obviously one that we have a lot of discussions with our private equity group clients about and i think if you kind of peel back some of the pieces the onion
You know, if you think about timing, if investments were made in 2016, 2015, you know, 2013, 2014, sometime in that period, and then you put yourself like five, six, seven years into old period, you run into COVID. COVID obviously disrupts the entire economy and has long-term impacts. You know, three, four, five years out, we're still seeing impacts related to COVID, especially the deal prices.
So, I mean, you know, some of the exits that have happened perhaps didn't happen at the price that the buyer was initially hoping for. They had to make a deal because of whatever reason that might have been out there for them. And then the growth of the company and some of the other things related to that company might have been different than what they would have expected pre-COVID.
And so I think that if you think about what COVID did to the private equity hold period,
Chapter 3: How has COVID influenced private equity hold periods?
I think you're seeing that come through in some of these other things that are being announced in the world related to a longer hold period, maybe some of the sale prices not being where they would have hoped for, expected, and perhaps an appetite for a longer period of a hold period because maybe they're able to kind of fix some of the things that happened during the COVID shock and then really be able to kind of
grow from there and then amplify growth in the future. So I think if you take it back from at least my perspective, a lot of this has to do with kind of the economic shock that COVID brought us to the entire economy.
Chapter 4: What is the current interest rate environment for private equity?
And fascinating. And what's your sense of the interest environment? People thought it would start to cooperate again, but it doesn't seem like it's going to cooperate again too much in the near future just because inflation is still there and hard to cut rates with relatively full employment and inflation. I mean, that's what people are really, really expecting.
A huge run up in activity in a 50 to 100 point reduction in interest rates this year. But that seems to be slowing some, at least the interest rates.
Chapter 5: What strategies are firms using to create value?
Yeah, I do think that's true. You know, I think with inflation and like you mentioned, the job environment kind of being where it's at.
you know if we're at a full employment you know world and inflation still kind of is that I clipped above where the Fed wants it to be you know they don't have a lot of other you know levers to pull you know to reduce interest rates would just create more inflation in theory and so I think We'll continue to monitor it.
But I think at some level, too, we have to balance that between the fact that we have full employment is also great for the consumer. Right. And I think if you think about our economy being heavily driven by consumer discretionary spending, you know, that's a big part of why we should continue to think about how do we capitalize on that piece of it and really try to
maybe manage what we can as business owners or private equity fund managers or whoever we are in the ecosystem and try to figure out, well, the interest rate environment is sort of out of my control. But one thing that is in my control is finding the consumers and taking more of the market share from them because they have cash, they're employed, they're out there working.
Let's find a way to get them to spend money in our business as opposed to somebody else's business.
No, I think that's true. And one of the challenges, of course, is if, in fact, you cut deficit spending at all and you keep interest rates still a little bit high, you're going to end up in a spot where exactly what you're talking about, for a period of time, it feels like it will be a bit more of a zero-sum game.
versus the expansive growth you had with low interest rates and insane deficit spending. Not that it's not good to get the deficit under control, but it does mean that some of the artificial growth and artificial opportunities will not be there.
Yeah, I think that's spot on, Scott. I think it just brings you back to really what we were talking about maybe even a year ago or even before that, before any interest rate cuts, when the interest rate environment is a little bit out of your hands, you can find value in other places to really drive even a growth and attraction.
Because I think what I keep hearing from private equity firms is that A assets still trade, B assets may or may not trade, C assets and below, it becomes very, very difficult to trade those assets. So I think you really need to focus on making your business as close to or an asset as possible so that you can find value.
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