I knew the private equity party was over when I started hearing about PE firms "rolling up" the car wash industry.
I live in a small town of 40,000 people, and we now have a car wash on, seemingly, every single corner. Every last one of them wants me to sign up for a monthly subscription. A monthly subscription for a car wash? Are you kidding me? If I am anywhere close to representative of the average American, we are about one more subscription from an armed insurrection.
American consumers are at their wit’s end. If you doubt that, take a look at the University of Michigan Consumer Sentiment Survey, which was recently scraping around down near a…checks math….64 year low. Plenty dismiss this survey as politically biased or "out of touch" with macroeconomic data. I say it’s the absolute truest indication of the consumer’s current state of mind. We are fed up, squeezed dry, and based on last month’s retail sales report, not in a mood to buy anything but the necessities. And, by the way, we aren’t too happy about that either with killer lettuce and steak so expensive the average person needs buy now, pay later to host a cookout.
To add insult to injury, while consumers are fed up with lousy customer service, big corporations are raking in record profits. But that doesn't include all those companies private equity spent the last 15 years milking dry. The New York Times reports that the leveraged looters are currently choking on a backlog of over 33,000 unsold companies they can't even IPO in a market that will buy damn near anything. Schadenfreude is not only allowed but encouraged.
For thirty years, institutional investors—our genius pension fund managers, university endowments, and sovereign wealth funds—bought the private equity sales pitch hook, line, and sinker. "Give us your cash for 5 to 7 years, pay us astronomical 2% management and 20% performance fees (that we'll call carried interest and pay capital gains tax rates on) and enjoy the free lunch of high returns and low volatility.” A lot of reputations were made on that formula, a bet that interest rates would stay low forever because, you know, the Fed has your back.
Now that zero interest rates are dead and buried, PE firms can't count on cheap debt to bail out their overpriced, AI threatened software companies and genealogy portals and car washes to other PE firms. So PE managers are quietly extending loan terms, sitting on dead portfolio assets, and wondering if they can retire or find a bag holder before the pitch fork crowd shows up at the gates of their mansion.
The LBO business model made sense in the 80s when there were lots of inefficient companies with bloated payrolls and conservative balance sheets. The Masters of the Universe cut costs, added a dollop of leverage and cashed out. But the companies who fit that model were gone a long time ago and private schools need tuition so the fee machine rolled on until we got to the car wash rollup and customer service worthy of the Soviet Union.
Now institutional investors are trapped in liquidity limbo, wondering how they pay the bills with PE scrip no one wants. The industry’s answer is an all out lobbying effort to get PE funds added to your 401k. And it’ll probably work since politicians’ campaign contributions are way more important than your retirement.
PE funds have never been barred from 401ks by the way. They haven't been included for one simple reason: they don’t meet the fiduciary standard required by ERISA. Companies with a fiduciary responsibility, and the legal liability to scare them into taking it seriously, don’t include funds with high fees, questionable valuation techniques and a lack of liquidity. Well, not if they want to avoid being sued by their own employees.
The Trump administration, in keeping with its tradition of not caring one whit what the actual law says, has issued an executive order that provides employers with their very own safe harbor fig leaf if they accede to the PE inclusion. And don’t think you can just ignore the PE fund listed in your menu of 401k investment options. They are going to hide PE inside your target date fund where roughly 40% of all 401k assets are held. You'll own PE and you'll like it.
The beatings will continue until consumer sentiment improves.
