Why Private Equity is in Trouble ⚠️

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What to expect (May 29)

• 🤫 Private equity has a dirty little secret holding it back

• ✅ Monster Pick - Long & High-Grade Copper

If you don’t know what private equity (PE) is or does, it’s basically a company that is funded by private investors that’s main goal is to acquire other businesses in the private sector, often small and midsize.

They don’t buy them all with their own cash, usually they use a good amount of borrwed money or debt.

The goal is to improve these businesses and sell them at a profit.

While also taking in management fees.

Historically, PE firms have delivered high returns, attracting more investors - which has caused the industry to explode.

For the past few decades, interest rates have generally been falling.

This makes borrowing cheap, allowing PE firms to buy businesses with less of their own money and more debt.

As borrowing costs dropped, PE firms could pay more for businesses, driving up their prices.

The problem now? Interest rates are climbing.

Higher rates mean borrowing costs increase, which reduces the buying power of PE firms.

They can’t afford to pay the high prices they once did, otherwise their returns will be lower.

A lot PE firms in the past 10 years bought businesses at peak prices using cheap debt.

As rates rise, the value of these businesses doesn’t necessarily increase. If these firms try to sell now, they’ll have losses.

The solution is to hold onto these businesses, hoping to avoid marking down their lost value on paper - a strategy known as "extend and pretend.”

Funds raised between 2019-2022 are seeing much lower distributions (profits paid out to investors) compared to earlier funds.

This tells us that PE investments made during this period aren’t performing as expected.

Data shows that distributions from 2019-2022 funds are down 81% compared to similar funds from 2015-2018.

The private equity industry operates on 10-year cycles, so if rates continue to rise, PE firms will struggle to deliver the high returns they promised investors.

This could cause the private equity industry to contract heavily in the next decade.

Over the past 5 years, private equity firms have been buying mining companies because they get better value privately than in public markets - this is changing.

As the cost of borrowing increases, PE firms will shy away from these acquisitions.

This creates an opening for companies to consider going public instead, not only in the mining sector but across all industries.

The public markets may become a more attractive avenue for raising capital as interst rates climb and private equity retreats.

This, along with rising metal and commodity prices, is creating a perfect opportunity for the junior mining industry by bringing in more capital than we've seen in a very long time.

Hold on tight everyone.

👋 Colton, Stock Monster.

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