Here are two stories that caught our eye this week:
1) Struggling To Return Capital Part II
“We already thought 2025 was going to be a challenging year for distributions…It’s going to be even harder than we thought.” — Ian Charles, managing partner of Arctos Partners.
Private equity and hedge funds were already struggling to return capital. We wrote about it last month.
But things are becoming more uncertain. Geopolitically. Economically. You name it.
Uncertainty breeds indecision.
Private equity is predicated on decisions — specifically going public or through mergers and acquisitions. Without it, private equity firms’ business model entirely freezes up.
That’s what we’re seeing today. More from the Wall Street Journal (emphasis added):
“One of Wall Street’s most consistent profit engines is close to breaking down.
Even before President Trump’s tariff chaos, buyout firms had been struggling to sell their portfolio companies and return money to anxious investors. Now recession fears and market turmoil have brought dealmaking to a near standstill.
Shares of Apollo Global Management, Blackstone, KKR, and other private-equity fund managers are down 20% or more this year, far worse than the S&P 500’s sharp losses.
The longer the deal logjam lasts, the harder it will be for firms to hand money back to clients such as pensions and endowments. The amount of unrealized value the funds owe their investors has hit record levels, according to an analysis by credit-ratings firm Moody’s Ratings. That makes it tougher for the firms to raise new funds.
“We aren’t even in a recession now, and we’re already at a point where things are incredibly challenging,” said Hugh MacArthur, chairman for private equity at Bain & Co.
Firms are sitting on a record 29,000 companies worth $3.6 trillion, half of which they have owned for five years or more, he said. Clients are becoming less willing to make new investments and buyout fundraising dropped by almost 25% last year, he said.
Even Blackstone is feeling the pain. The private-equity giant, which reported first-quarter earnings Thursday, said market volatility might lead North American institutional investors to “slow down decision-making” about allocating money due to expectations of lower payouts. The firm has other fast-growing businesses including private lending and private wealth.”
This “logjam” perpetuates a negative feedback loop… whereby no future deal flow gets done until these companies exit. No deal flow. No price discovery. Complete freeze.
What’s worse, these private equity firms don’t have cash on hand to take advantage of what could be good prices.
The amount of money firms have on hand, or “dry powder,” relative to the amount they have locked up in unsold companies is at a record low, according to Moody’s.
Liquidity is everything. These firms don’t have it on the buy side or the sell side.
Not good.
2) Spotify Raises Prices… Again
Don’t worry U.S. subscribers. You were spared.
Spotify is raising prices for its European and Latin American subscribers.
Spotify’s capital expenditures have remained steady the last couple years… meaning price increases pretty much flow straight to the bottom line.
Longtime readers know Spotify has been crushing it recently due to the mea culpa by its founder and CEO Daniel Ek.
In fact, Spotify’s stock is up over 30% this year alone and hovering at its highs while every stock has been beaten down in this year’s bear market.
Music has shown to be “recession proof.” Spotify wouldn’t increase prices if it wasn’t confident subscribers would pay.
Digital products aren’t affected by tariffs either. Which is why its stock has outperformed.
Separately, investment bank TD Cowen showed “consumer spending on recorded music relative to overall personal consumption expenditures remains at less than half the level reached during the peaks in the 1990s, before the industry was disrupted by digital distribution.”
Source: Investment Bank TD Cowen
That’s why investors are rewarding Spotify’s stock. It should continue to outperform.
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DISCLAIMER: This is solely our opinion based on our observations and interpretations of events. This should not be construed as personal investment advice.
