Shares of U.S. private equity firms, which emerged as major players in financial markets with explosive growth over the past decade, have been on a downward trajectory recently. While Wall Street investment banks (IBs) are reaping large benefits from a surge in initial public offerings (IPOs) and mergers and acquisitions (M&As) driven by the artificial intelligence (AI) boom, private equity firms are struggling as they miss out on investment opportunities in promising companies and face the added blow of capital outflows.
According to the Financial Times (FT) on the 22nd, shares of major private equity firms have fallen more than 15% this year and more than 20% over the past year. Looking at individual companies, Blackstone's shares dropped 20.32% this year, while Apollo Global Management fell 17.77%.
This stands in sharp contrast to major U.S. investment banks. Shares of large IBs such as Goldman Sachs, Morgan Stanley, JPMorgan Chase, and Citigroup have risen more than 18% over the past year.
Only a few years ago, private equity firms were considered among Wall Street's blue-chip stocks. At the time, the market rated their business models as offering superior growth potential compared to traditional banks and as being structurally resilient to financial market volatility. On top of that, private equity firms went so far as to overhaul their governance structures in 2019 to attract index fund money.
In this process, Blackstone surpassed 1 trillion dollars in assets under management (AUM) and even overtook Goldman Sachs and Morgan Stanley in market capitalization. But Blackstone's current market cap does not even reach half that of these banks.
The divergence in fortunes between the two sectors stems from the fact that the benefits of the AI-centered capital market boom are concentrated in the IBs. Buoyed by President Donald Trump's deregulation stance and the rise in large IPOs and M&As, major IBs have recently posted record-breaking earnings.
By contrast, private equity firms held only a marginal share of investments in promising AI startups, including SpaceX. In addition, a rise in redemptions this year from private credit funds, which had been a key source of income, dealt a direct blow to investment sentiment.
The macroeconomic environment is also weighing on the sector. As interest rates have remained high following the war between the United States and Iran, concerns are spreading that credit risks could increase for companies acquired by private equity firms with large borrowing burdens.
As a result, some in the market are raising the possibility that the slump in private equity firms could be prolonged. Barclays diagnosed that "the deal activity the market had expected has yet to materialize in earnest."
However, some analysts forecast that the private market could gradually recover if the current IPO and M&A boom, now concentrated in large technology companies, spreads across industries as a whole.
