A long era of easy profits in private equity is gone, and Goldman Sachs Group Inc. is digging in deeper for the harder work ahead.
That’s the message from Marc Nachmann, the head of the Wall Street firm’s money-management arm, adding his voice to the chorus of industry leaders declaring the buyout business has passed a critical juncture. A period of profits driven by financial engineering and “multiples expansion” is over, Nachmann said in an interview.
“Where your returns come from will be much more focused on creating better earnings growth,” he said.
To that end, Goldman is bringing in corporate muscle, hiring Darius Adamczyk — the former head of Honeywell International Inc. — to parachute into portfolio companies that the bank works with and help fix their operations.
Even at a bank known for scooping up high-profile advisers, adding a 58-year-old former chief executive officer of a sprawling industrial conglomerate is hardly ordinary.
“It’s a little bit unusual,” Nachmann said. “He’s pretty young to be a retired CEO. And he’s a retired successful CEO who wants to roll up his sleeves and help.” The Wall Street firm’s asset management business oversees some US$140 billion ($189.91 billion) in private equity assets and counts more than 300 portfolio companies under its charge.
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The private equity industry is exiting a long, golden stretch aided by rock-bottom interest rates after 2008. The new normal of higher rates has boosted acquisition costs, crimped valuations and made it harder to unload portfolio companies with attractive returns — at least without fundamentally improving their operations.
A half-century ago, that was in fact the stated mission of private equity pioneers.
Investors in such funds have been getting uneasy and impatient. According to Nachmann, it’s game over for the kind of operators who raised money and then sat back and watched gains roll in.
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No longer can you “be the highest bidder, buy the company, sit there, wait for multiple expansion and sell again,” he said. Fund backers dubbed LPs — for limited partners — are running the numbers on recent deals to suss out who drove higher returns by growing earnings and who relied on financial hijinks.
“When I talk to larger LPs, they have some names in mind,” Nachmann said. “Some are higher-profile than others.”
One of Apollo Global Management Inc.’s most senior executives, Scott Kleinman, hit similar notes at a gathering this month, warning “everything is not going to be OK” and investors shouldn’t expect the type of buyout returns that until 2022 were often buoyed by market exuberance, climbing valuations and financial engineering.
One metric that has become a proxy for satisfying fund backers — such as pension systems, college endowment programs and sovereign wealth funds — is distribution, which tracks capital returning to their pockets.
That’s hovering at its lowest level in over a decade, leaving some institutional clients strapped for the cash they need to fulfill missions and fund commitments to new investment vehicles.
Goldman Sachs isn’t often thought of as a key player in that industry, even though its stockpile of alternative assets ranks among the largest. Its investment bank more often grabs public attention.
For years, the firm has leaned on what it calls the Value Accelerator to pair companies with advisers who have expertise in those sectors. That’s led by the former CEO of Avaya and has tapped executives from places including Coca-Cola Co., Intel Corp. and HP Inc.
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The key for higher returns in the future, Nachmann said, will be to source good deals and focus on operational improvements.
Adamczyk ran Honeywell from 2017 to 2023. When he stepped down, it had more 90,000 employees, or roughly twice the headcount at Goldman. During his tenure, he strengthened his company’s relationship with the New York-based bank, and its CEO, David Solomon, and his deputy John Waldron count him as a friend.
“We’re thrilled to have him join us,” Solomon said in a statement. “I have so much respect for his leadership and the value he created at Honeywell.”
