Private Equity Basics

Hot off the press is the latest private markets quarterly update from our CIO team. Here’s what we’re seeing right now across asset classes: In #privateequity, we still like value-oriented buyouts, and specifically, managers with strong track records in operational value creation. We also recommend allocations to secondaries, as secondary exit solutions should remain a favored liquidity option and NAV discounts remain in the double digits. We continue to recommend #privatecredit, but selectivity will be key as manager dispersion is far greater here than in public credit. Spreads have tightened as competition has returned to the loan market. But we remain constructive on the sector given yields near 10%, low defaults, declining leverage, and ample covenants. Our outlook for lower growth combined with two Fed cuts in 2H25 is also supportive. In #realestate, a bottoming trend in a majority of CRE values began occurring in late 2024. We believe 2025-30 will be rewarding for investors that can identify and lean into markets benefitting from strong demographics, migratory patterns, and job creation. We believe there are opportunities emerging from properties facing financial distress that are still solid assets – which we’ve often seen in multifamily. Full report below.

Private Thoughts From my Desk…………….#46 𝗠𝘆 𝗧𝗼𝗽 𝟭𝟬 𝗧𝗮𝗸𝗲𝗮𝘄𝗮𝘆𝘀 𝗳𝗿𝗼𝗺 𝗕𝗮𝗶𝗻’𝘀 𝟮𝟬𝟮𝟲 𝗚𝗹𝗼𝗯𝗮𝗹 𝗣𝗿𝗶𝘃𝗮𝘁𝗲 𝗘𝗾𝘂𝗶𝘁𝘆 𝗥𝗲𝗽𝗼𝗿𝘁 Our annual private equity report is out (https://bit.ly/4tXSQi8), and as I say in the introduction, 2025 was the year the industry regained traction. But it was also the year we crossed into a new era, with a K-shaped recovery that is rewarding the most scaled and most differentiated platforms, while everyone else fights harder for deals, talent and capital. My top 10 takeaways are below. Would love your thoughts. Drop them in the comments. 𝗧𝗵𝗲𝗿𝗲 𝗶𝘀 𝗴𝗼𝗼𝗱 𝗻𝗲𝘄𝘀 𝗶𝗻 𝘁𝗵𝗲 𝗺𝗮𝗿𝗸𝗲𝘁𝘀. 𝟭) Buyout deal value snapped back in a big way, reaching $904B, up 44% vs 2024, even though deal count fell and average deal size hit a new high. 𝟮) Exits returned with real force, with buyout backed exit value up 47% to $717B, helped by strategics coming off the sidelines and early signs of an IPO thaw. 𝟯) The ingredients for more dealmaking are sitting right there, easing interest rates, improving financing windows, and massive dry powder still waiting to be put to work. 𝗛𝗼𝘄𝗲𝘃𝗲𝗿, 𝘁𝗵𝗲 𝗿𝗲𝗰𝗼𝘃𝗲𝗿𝘆 𝗶𝘀 𝗻𝗮𝗿𝗿𝗼𝘄, 𝗮𝗻𝗱 𝘁𝗵𝗲 𝗹𝗶𝗾𝘂𝗶𝗱𝗶𝘁𝘆 𝗵𝗮𝗻𝗴𝗼𝘃𝗲𝗿 𝗿𝗲𝗺𝗮𝗶𝗻𝘀. 𝟰) Prices are still high, multiples are expected to stay flat, and the headline rebound was driven largely by a handful of $10B+ megadeals, while the bid-ask gap remains the most common breaking point when deals fail. 𝟱) The liquidity squeeze is still the defining problem, with distributions stuck around 14% of NAV, roughly 32,000 unsold companies worth about $3.8T, and average hold periods stretching to seven years 𝟲) Fundraising is telling the same story, buyout fundraising fell 16% to $395B, fund closes dropped again, and LPs constrained by old commitments are concentrating capital with the most proven DPI performers. 𝗧𝗵𝗲 𝗣𝗘 𝗶𝗻𝗱𝘂𝘀𝘁𝗿𝘆 𝗵𝗮𝘀 𝗮 𝘁𝗼 𝗱𝗼 𝗹𝗶𝘀𝘁 𝗳𝗼𝗿 𝘁𝗵𝗶𝘀 𝘆𝗲𝗮𝗿 𝗮𝗻𝗱 𝗯𝗲𝘆𝗼𝗻𝗱. 𝟳) Deal math has changed for good, with borrowing costs around 8% to 9% and lower leverage, sponsors now need something closer to 10% to 12% EBITDA growth to hit a 2.5x return over five years, which puts operational value creation back in the driver seat. 𝟴) The winning model is end-to-end and repeatable, full potential diligence, faster execution, and AI enabled value creation across commercial, operational, tech, and sustainability levers. 𝟵) The cost of alpha is rising while economics are under pressure, headline fees are drifting down, co investment is now table stakes, and LPs are pushing harder on terms because many feel they have more leverage than they did a year ago. 𝟭𝟬) Strategy clarity is now non-negotiable for GPs. In a crowded market, LPs want a defensible identity, a repeatable alpha engine, and a credible 5-year ambition anchored in distribution discipline, not just narrative. #privateequity #privatemarkets #privatethoughtsfrommydesk

A lot of people in Audit want to move into Investment Banking or Private Equity but most don’t know what the real paths look like. In practice, there are only a few that actually work. Path 1: Tier-1 MBA The cleanest reset. You enter IB/PE recruiting directly through IIMs, ISB or global schools. High cost, high probability. Path 2: Skill-build route Audit → CFA → Valuations / TAS → IB or PE You don’t change your brand overnight, you change what you can do — modelling, deal work, business analysis. Path 3: Credit & Private Markets Audit → Credit Risk → Private Credit → PE Understanding downside risk and cash flows is extremely valuable to funds. Path 4: Unlisted / Pre-IPO / Secondaries You get close to real deals, PE funds, and late-stage companies — a very underrated entry point. There isn’t one “right” way in. Just like investing, careers also have multiple routes. The key is choosing one that compounds your exposure to real capital.

If we at KKR had a mantra for RE Private Equity investing going forward, it would be ‘Back to the Future.’ The current landscape mirrors the early days of the industry, highlighting both a continuation and acceleration of trends from the past 10-15 years. We are once again in a time of dislocation, where new sources of opportunistic capital are needed to replace debt and core equity capital that has become scarce. The recent Fed tightening and post-pandemic pressures on the Office sector have led to a 22% drop in asset prices since Q1 2022, reminiscent of the 21% decline from 1989-93 and the 36% during the GFC. Also similar to the RTC era is the flight of lower-cost bank leverage and core equity capital. On the equity side, cumulative five-year outflows from open end core funds are now the largest in the history of the industry, as a risk-adverse investor base has become more wary of poor backward-looking performance. We view this flight through a positive lens, as it creates space for Opportunistic equity capital to fill the void, particularly as cap rates have risen, creating the potential for Opportunistic returns from assets with more Core-like risk profiles. Read more about Real Estate Equity and Debt as well as other asset classes at https://go.kkr.com/4dARQqR

A "Shadow MBA" in Private Equity costs $0 and teaches you how to actually buy a business. If you want a seat on the Norland Capital LTD Deal Desk, do not send me your business school transcript. I want to know if you can read a distressed balance sheet, strip out the fake EBITDA, and legally structure downside protection. If you are an Analyst or Consultant trying to break onto the buy side, stop reading academic textbooks. Here is the exact 4 part Private Equity Shadow MBA you need to study. Bookmark this syllabus. You will need it. 1. The Legal Architecture (The SPA) Do not read theory. Read the actual contracts. Go to the SEC EDGAR public database and search for "Exhibit 2.1" (Stock Purchase Agreements) of recent middle market acquisitions. Study the "Indemnification" clauses. Study how they define the "Net Working Capital Peg." The financial model is just a guess; the Share Purchase Agreement is where the actual money is legally transferred or lost. 2. The Debt Mechanics (Covenant Defaults) Stop reading generic macro economics. Read the restructuring and debt finance whitepapers from elite law firms like Kirkland & Ellis. Understand exactly how a "Fixed Charge Coverage Ratio" works in a cyclical downturn. If you cannot model a technical covenant breach, you have absolutely no business sizing senior debt for a buyout. 3. The Valuation Trap (Quality of Earnings) Sell side Adjusted EBITDA is a marketing fiction. You need to learn how Financial Due Diligence (FDD) actually bridges to cash. Hunt down Big 4 advisory whitepapers on "EBITDA Add Back Defensibility." Learn the exact mathematical difference between a broker's pro forma synergy and a company's historical free cash flow. 4. The Operational Reality (The 100 Day Plan) Consultants talk about high level strategy. PE operators talk about cash conversion cycles. Study distressed turnaround case studies. Pull the working capital metrics of public industrial competitors using Damodaran's free corporate finance data sets. Figure out the exact operational levers required to strip 30 days of delayed cash out of a stagnant supply chain. This is the baseline. If you do not understand these four pillars, you are just playing with theoretical spreadsheets. Save this post for your weekend deep dive. Send it to the junior analyst on your desk who still thinks an 80% levered LBO model is a good idea. Let's see who is actually willing to put in the raw hours to learn the craft.

Compelling insights on the evolution of private #realestate investing from Henry McVey and his team’s latest KKR piece, “An Alternative Perspective”. In the world of real estate, we’re witnessing a new cycle emerge. From the early days of opportunistic investments during the RTC era to the post-GFC structural shifts, the landscape has evolved dramatically. Today, we’re at another inflection point, echoing the past while accelerating into the future. Key takeaways: 1) 𝐇𝐢𝐬𝐭𝐨𝐫𝐢𝐜𝐚𝐥 𝐂𝐨𝐧𝐭𝐞𝐱𝐭: Real Estate Private Equity emerged from the need for new equity capital during the commercial real estate crisis of the late '80s and early '90s, kicking off the industry’s first leg of growth. 2) 𝐏𝐨𝐬𝐭-𝐆𝐅𝐂 𝐄𝐯𝐨𝐥𝐮𝐭𝐢𝐨𝐧: Institutional interest surged behind the modern generation of multi-strategy private markets investors, with multifamily and industrial sectors coming to the forefront and new alternative sectors like data centers, life sciences and senior housing beginning to flourish. 3) 𝐂𝐮𝐫𝐫𝐞𝐧𝐭 𝐎𝐩𝐩𝐨𝐫𝐭𝐮𝐧𝐢𝐭𝐢𝐞𝐬: With rates plateauing and valuations largely corrected, the stage is set for a promising new upcycle where we see opportunities for scaled providers of real estate equity and credit to create attractive diversified portfolios. The future of real estate is bright, and the opportunities are vast, anchored to ongoing deleveraging and durable demand drivers for modern property sectors. Dive deeper into these trends and more in the team’s comprehensive report. 👉 Download it here: https://go.kkr.com/3zAJqld

Real estate will never be the same. For a decade, it was a bond substitute. Stable. Predictable. Yield play. Now, it’s become a true opportunistic asset class. The investors who don't adapt will get left behind: 1/ The "fixed-income era" is over: From 2010-2021, real estate behaved like a bond substitute: • Low rates drove cap-rate compression • NOI growth felt automatic • Investors wanted stability, not complexity • Cash flows were predictable, underwriting was straightforward Real estate played the coupon role in portfolios. And everyone got comfortable. The question wasn't "can we create value?" It was "can we find yield?" 2/ Rates broke the model: When rates snapped back, the bond-like assumptions broke with them: • Cap rates didn't re-rate fast enough • NOI slowed or reversed in multiple sectors • Office impairment hit balance sheets • Refi risk spiked • Liquidity evaporated from traditional buyers • Special sits and structured credit took center stage Real estate stopped behaving like fixed income. It started behaving like private equity. The playbook that worked for a decade stopped working overnight. 3/ Real estate is now in the "opportunistic" bucket: Investors are underwriting complexity, not stability: • Distress • Recaps and rescue capital • Pref equity and structured credit • Development with real value creation • Operating-platform plays • OpCo/PropCo strategies • GP stakes and platform roll-ups The buyers showing up today aren't core funds. They're PE, hedge funds, special sits, and family offices who want 12-20%+ IRRs and can execute complexity. Returns now come from active management and structural innovation, not passive income. 4/ What this means for investors and GPs: The next cycle rewards operating excellence: • "Easy yield" is out, value creation is in • Deals need a real business plan, not just cap-rate spread • Winners will underwrite variability, not chase stability • The edge moves from "access to capital" to "ability to execute complexity" GPs who figure this out will raise. The ones who don't will struggle to find capital. The LPs writing checks today aren't looking for yield. They're looking for operators. Real estate isn't competing with bonds anymore. It's competing with special sits, private credit, and opportunistic PE.

An interesting trend we're seeing in the European PE market: North American PE investors are gaining share. They now account for 30% of all PE deals over €10m in EBITDA (up +9 p.p. over the last 7 years). A couple of reasons why: 📈 Europe has lower PE valuations compared to the US. This makes it an attractive market for both platforms and add-on deals. 📈 US sponsors have had stronger fundraising momentum than European investors. This has allowed them to outcompete in many deal situations. 📈 US sponsors are more familiar and experienced with alternative financing and private credit, given the higher maturity in their home market. This gives them an edge. Not to mention, many US investors have announced European expansion plans and launched dedicated funds in Europe. 💵 Thoma Bravo announced its first-ever €1.8bn dedicated fund in Europe. 💵 Blackstone announced an additional $500bn commitment for the next decade. 💵 Apollo announced plans to invest $100bn in Germany over the next decade. US investor activity is the strongest in: ⏫ UK&I (39% of all entries), DACH (27%) and Iberia (25%) ⏫ Large-cap transactions (>€200m EBITDA — 37% of entries) ⏫ Financial Services (42% of all entries) and TMT (31%) Where do local investors still dominate? 🇪🇺 France, Benelux and Nordics (~80% of deal flow is local) 🇪🇺 Small-cap transactions (<€10m EBITDA — 90% local) 🇪🇺 Science & Health, Services, and Consumer (~75% local) ________ FULL REPORT AND DATA We've just released a 44-pg report on the State of European Private Equity, covering entries, exits, holding periods, growth rates, and much more. Don't miss out on the 56+ charts. 👉 Get it here: https://lnkd.in/emkSDDzz #Europe #PrivateMarkets #Insights

For more than a century, wealth has evolved from land to industry to liquidity. Yet in 2025, the Family Office portfolio looks more like a carefully composed museum collection than a Wall Street experiment. Every piece serves a purpose. Every percentage tells a story. According to Citi’s latest Global Family Office Report, public equities hold the largest share at 27%, followed by 15% in fixed income and 13% in cash and cash equivalents. That combination forms a steady core that would make any nineteenth-century banker proud. Stability, yield, and optionality remain as timeless as compound interest. The next chapter belongs to private markets. Private equity funds and funds of funds make up 11%, and direct private equity investments add 9%, for a combined 20% in long-term ownership. Real estate direct investments contribute 12%, and real estate funds add 2%, bringing total property exposure to 14%. Families have always trusted what they can touch. Whether it was a mill, a building, or a vineyard, real assets still anchor confidence. Then come the modern layers of diversification. Hedge funds hold 5%, private credit 3%, with smaller slices in commodities (1%), other assets (1%), digital assets (1%), and art (less than 1%). Art may barely register on the chart, yet it often becomes the most discussed holding. A painting can start a dinner conversation faster than a private credit fund ever could. In total, about 60% of assets sit in liquid markets, while 40% live in alternatives. The structure feels less like a gamble and more like a philosophy. It represents a century of evolution in how families manage wealth. Liquidity provides comfort. Private ownership builds legacy. Smaller experimental pieces keep things interesting. Each part of the portfolio expresses a kind of quiet wisdom. Public markets create movement, fixed income and cash preserve calm, private equity and real estate sustain engagement, and the rest remind everyone that wealth can be both strategic and creative. The modern Family Office portfolio is less about chasing opportunity and more about curating it. It is the financial equivalent of a well-built estate: solid foundation, thoughtful design, and a few unexpected details that make it uniquely alive.

Manager Selection: The Hidden Alpha Engine “It’s not just the strategy. It’s who’s driving the car.” We obsess over strategies: macro vs long/short, private equity vs credit. But in alternatives, it’s often not what you buy—it’s who you back. Top-quartile managers can outperform by thousands of basis points. And yet, due diligence often gets treated like a checkbox. I’ve seen funds with dazzling decks and nothing under the hood. And I’ve seen quieter managers with airtight process, discipline, and skin in the game deliver decade-long outperformance. Manager selection isn’t always glamorous. But it’s your real edge. Don’t chase alpha. Allocate to it. #bealternative So how do you identify the right managers—and avoid the wrong ones? Here are five actionable principles backed by Hedge Fund Due Diligence, Due Diligence and Risk Assessment of an Alternative Investment Fund, and Private Equity Compliance: 1. Prioritize Behavioral Red Flags Over Marketing Shine Most blowups stem from behavioral warning signs—not poor returns. – Be alert to evasive answers, overpromising, and CV inconsistencies. – If the manager can’t clearly explain their worst drawdown, walk away. Operational risk often wears a smile. 2. Use a Layered Due Diligence Framework – Investment: strategy clarity, mandate discipline, leverage use. – Operational: NAV policies, service providers, valuation controls. – Manager: track record, co-investment, legal history. A strong fund passes all three layers—not just the first. 3. Move Beyond the Checklist Mentality – Ask how—not just what. – Request audit letters, compliance manuals, fund org charts. – Evaluate how quickly and how clearly information is shared. It’s not what’s disclosed. It’s how it’s delivered. 4. Re-underwrite Annually—Not Just at Allocation Diligence doesn’t stop once the subscription agreement is signed. – Monitor for style drift, team turnover, and audit delays. – Build an annual risk scorecard: manager alignment, NAV consistency, valuation transparency. Great managers stay great when they’re held accountable. 5. Investigate the “Why” Behind the Performance Outperformance isn’t always repeatable—but process is. – Ask: “What edge do you believe is durable?” – Review decision-making consistency, not just returns. – Confirm fee alignment, risk-adjusted mindset, and long-term incentive structure. Strong governance and repeatable process beat personality and narrative—every time. Alpha doesn’t live in the deck. It lives in the decisions behind it. What’s your non-negotiable when assessing a manager beyond performance? #bealternative