Breakingviews: Private equity enjoys its wet hot American summer

The mercury is rising in private equity’s elite bower. KKR more than doubled second-quarter distributable earnings – its main measure of profit – compared with a year earlier, improving on a pattern set by rivals Blackstone and Carlyle. By every measure, buyout barons are raking it in. Even once-existential threats to capitalism are, for now, making them richer.

The $54 billion KKR and its peers are buoyed by three main trends. Valuations of companies they own are rising, juicing up private equity investments held by Henry Kravis’s firm by 56% over the past year. A red-hot merger market has helped turn investments into cash, and investors still want higher returns than they can get through more lowbrow asset classes.

The result is a lot of records being broken. KKR’s fee-related earnings hit a new high in the second quarter. At Steve Schwarzman’s Blackstone, assets under management hit $684 billion. Kravis’s firm put a record amount of customers’ money to work. Schwarzman’s sold an unprecedented $63 billion of assets. Carlyle set a new peak for accumulated paper profit.

Even if this can’t go on forever, the firms are using the opportunity to diversify while the going is good. Blackstone just invested in Hollywood actor Reese Witherspoon’s company. KKR bought an insurer. Along with Carlyle, the three have nearly $320 billion of dry powder, more than President Joe Biden plans to spend on fixing up America’s transportation infrastructure.

On which note, even Biden himself has been good to Kravis and Schwarzman. Talk of increasing the capital-gains tax rate has pushed some company owners into handing over the keys earlier than they might otherwise – witness Blackstone and Carlyle’s $34 billion deal with Medline. A White House bid to toughen up antitrust reviews may leave fewer bidders for companies that do decide to sell.

Private equity’s biggest advantage may be that its customers are happy to turn over a hefty slice of their profit when things go well. Investors in the listed companies are doing well, too. Blackstone investors have doubled their money in a year, including dividends. Even Carlyle, the smallest of the three, has double the returns of the S&P 500 Index. If not a golden age, it’s at least a wet hot summer.

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