Breakingviews: Private equity is getting its story straight

Carlyle named a new boss; KKR embarked on a insurer-merger makeover; Apollo Global Management  touted its rise to debt-printing machine. The era of high interest rates choked off deals, cut into earnings, but saw a flowering of strategic shifts among buyout shops. The industry’s giants now all have a story to tell about why they’re on stronger footing. As the U.S. Federal Reserve loosens its stranglehold, the strategic mania should ease. But as they’re showing, buyouts still matter.

Harvey Schwartz, now a year into the top job at Carlyle, on Wednesday unveiled turnaround targets, joining his major rivals in crystallizing a big-picture post-pandemic operational overhaul that helped send shares up nearly 9%. He is cutting costs and shifting around compensation in ways that should boost earnings in the coming quarters.

Rivals’ plans for the future run the gamut. KKR bought the remaining stake it didn’t own in insurer Global Atlantic in November, and promises to develop a stable of on-balance-sheet, dividend-paying companies. Blackstone vowed it will notch another $1 trillion in assets as it further taps both retail investors and insurers. Apollo on Thursday raised its aspiration to print as much as $250 billion of debt that can feed its insurance business annually.

All of that reflects the big four’s shifting focus from lumpy buyout income to steadier fees, insurance, and investment earnings. And that makes sense. As interest rates shot up, choking off the supply of cheap debt with which to juice deals, earnings dropped.

But now that the Fed is holding steady, that’s beginning to reverse. The group’s earnings speak to the fact that the old business of buying and selling assets still exerts gravity. Blackstone and KKR turned around over a year of declines; Carlyle’s downturn is slowing.

The deal-drought era – private equity-backed M&A in 2023 fell 30% from 2022, according to LSEG data – seems to weigh on the strategic shifts. All downplay buyouts and reach for steadier sources of income, edging in on businesses that look more like banking. Investors seem somewhat convinced by Apollo and KKR’s big-balance-sheet approaches: Shares of both are above their pandemic-era peaks.

But, to varying degrees, all of them depend on the ability to transact: Lucre from deals equated to a fifth of KKR’s earnings and 29% of Carlyle’s revenue last quarter. And deal flow affects demand for private loans or arranging transactions. Next time might be better; chances are, it won’t be that different.