AmiSight 9/30: Yesterday's Assumptions Aren't Tomorrow's Facts
For years, private equity benefited from cheap money. Borrowing costs were low, valuations were high, and there was usually another buyer waiting when it was time to sell.
That math has changed.
The Wall Street Journal reports that a record $349 billion is now tied up in so-called “zombie funds” — private-equity funds that are more than 10 years old and still haven't been able to exit all of their investments. Higher interest rates are making the problem worse. Debt costs more, buyers can't pay the same multiples, and investors are waiting longer to get their money back.
What caught my attention is how quickly a strategy that worked for years can get into trouble when one of its basic assumptions changes.
I see versions of this with entrepreneurs all the time. A business model, acquisition strategy or capital structure can work extremely well — until the environment it was built for changes.
The lesson isn't that the original strategy was necessarily wrong. It's that yesterday's assumptions shouldn't automatically become tomorrow's facts.
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