At a moment when volatility has become a permanent feature of the global economy, the Milken Institute’s 29th annual Global Conference unfolded less like a celebration of capital markets and more like a high-level stress test of them.
Over the four days, executives, sovereign wealth leaders, policymakers and investors returned repeatedly to a few interconnected themes shaping the next era of global finance. That included escalating geopolitical instability, the rapid evolution of artificial intelligence, the big shift from software to hard tech, growing concerns about the durability of the private credit boom, and the state of private equity firms’ appetite for deals.
Panelists acknowledged that the backdrop was impossible to ignore. Ongoing wars abroad, trade tensions, energy disruptions and political fragmentation hovered over nearly every discussion inside the Beverly Hilton and Waldorf Astoria, where thousands gathered for more than 200 sessions.
The Business Journal editorial team joined the conference, speaking with executives, investors and policymakers to explore some of the issues dominating their year’s gathering.
The Way Out of Exit ‘Crisis’
Parched for exit opportunities in a historic private-equity selloff drought, an estimated 33,000 companies are stuck in firms’ portfolios. And getting things moving will mean settling for less or wading carefully into alternative exit strategies, such as continuation vehicles, industry leaders at the conference said.
In a panel discussion addressing private equity’s liquidity challenges, Jonathan Sokoloff, managing director at Westwood-based Leonard Green & Partners, tapped the exits as an industry “crisis.”
“We’re all doing a pretty good job investing the money, growing the business, but exits are really difficult,” said Sokoloff, who has co-led the $85-billion private equity firm since 1990.
Bottlenecks have grown in the four primary paths to unloading an asset – strategic sales, private equity sales, initial public offerings and continuation vehicles. Firms carrying companies “too high” are further hurting their returns, Sokoloff said.
“If you wait for the dream price and don’t get it, and you hold and hold, your (internal rate of return) goes down and down and down,” he said. “We’re in the business of buying and selling, and you just have to sell at some point.”
General partners in attendance echoed a mantra that’s caught on in private equity: “DPI is the new IRR.”
In a slow-exit environment with tight liquidity, firms are shifting their focus to distributed paid-in capital, or actual cash returned to investors, rather than paper gains.
As managers race to prove they can return real cash to investors, many falter when lofty valuations for companies that attracted backing don’t hold up against the looming threat of geopolitical risks and artificial intelligence, said Dipanjan “DJ” Deb, co-founder and chief executive of technology investment firm Francisco Partners. As a result, private equity is sitting on a “massive growth equity” bubble, he said.
“(AI) is going to create a huge dispersion of winners and losers in our own portfolio,” said Deb, acknowledging the so-called ‘SaaSpocalypse’ that saw billions in market value wiped out for software-as-a-service firms and other AI-threatened sectors earlier this year.
A flight to quality from buyers like Fidelity Investments and corporates has left a swath of portfolio assets to sit and weigh on returns, said Paul Taubman, founder and chief executive of advisory-focused investment bank PJT Partners.
“You get into a much larger group of assets where there’s not a compelling reason to act today,” Taubman said. “You have a highly discriminating class of strategic buyers.”
Emerging exit pathways
The perfect storm private equity leaders describe brought the industry’s exit count down by 15% last year compared with 2024, according to McKinsey report. IPOs were the only exit route to rise year over year, with the private equity-backed IPO market nearly doubling in value to over $320 billion.
But behind the figures suggesting a recovery in such public deals lies a growing unease about IPOs as an exit strategy. Despite solid market performance, IPOs have become less attractive for private equity firms who’ve found it difficult to successfully list anything but their “best-in-breed” assets, said Dean Mihas, co-chief executive and managing director at GTCR.
“Taking a company public these days, unless it’s of a very significant size profile that can get long-term investor interest or a very, very strong growth profile, it’s very hard,” said Mihas.
As IPOs lose their shine, the secondary market – where private equity firms sell their stake in a company to another firm rather than waiting for an exit – has boomed as a way to create liquidity.
Secondaries have logged three consecutive record fundraising years but remain “undercapitalized,” said Yann Robard, managing partner of Toronto-based private equity firm Dawson Partners. Despite a surge in fund flows, demand for liquidity still far outpaces available buyer capital, with $226 billion deployed last year compared to $165 billion raised.
“It kills my soul every time I see a headline saying, ‘Best fundraising year for the secondary market,’” Robard said. “This is an asset class that is shrinking, not growing, from a dry powder perspective.”
Another solution that has ramped up in the face of exit slumps is the continuation vehicle, to which firms can move expiring assets from an existing fund to extend ownership. CVs made up roughly 14% of all private equity exits last year, according to McKinsey.
“(CVs) are not going to overtake, but they’re providing more liquidity to an otherwise illiquid asset class,” Robard said. “If it’s done in the right way, it can be additive to the market.” – Christina Chkarboul
The Pivot: Software to Hard Tech
Does Hadrian Automation Inc. want to make factories sexy again?
For Chief Executive Chris Power, that answer is an unambiguous “yes.”
“It’s a serious question,” he said. “Aesthetics are really important for job creation and getting people back to meaningful work. No one wants to work in a legacy factory, especially if you grew up on the internet.”
While the software industry has been heralded as a safe, high-earning career path and a cornerstone of the economy, the trades are becoming an increasingly important part of a new hardware-focused tech sector, according to tech executives at the conference.
“Most of our products are built by small, engineering-focused five to 10 people,” said Julie Bush, co-founder and chief executive of defense tech company Valinor. “And of all of them, it’s maybe one software engineer at this point, maybe two. The place I am investing in when it comes to talent is the welders, the people bending metal.”
At the Future of War panel, where both Bush and Power spoke, participants explored the boom in the manufacturing and weapons sector, which is only a stone’s throw away in the South Bay.
Boom by design
Power, whose Torrance-based company Hadrian is building AI-powered factories, is part of the hard-tech renaissance that’s using software’s advanced capabilities to make domestic manufacturing at scale faster, cheaper, and safer.
That means looking for workers who code, develop, and get their hands dirty on the factory floor rather than typing away at a standing desk, Power said. At Hadrian, around 40% of the software engineering team consists of decades-long casting experts and welders who once worked at Space Exploration Technologies Corp. – better known as SpaceX, founded in Hawthorne.
“If I can get a welder to rip a user interface, it’s probably going to be the best product design ever because they’re that close to the problem,” Power said. “It’s one of those accessibility things. If you’re a genius machinist or a welder and you’ve been doing it for 20 years, maybe you don’t have a Stanford CS degree, but you can do advanced trig in your head in 30 seconds. You can learn how to code.”
Manufacturing has seen a boost in the U.S. over the last few years as the country began to prioritize domestic manufacturing. In the last two years alone, advanced manufacturing startups have raised $32.3 billion, according to PitchBook Data Inc.
“What China has built in terms of manufacturing capacity is something I don’t think the world has seen before,” said Dino Mavrookas, co-founder and chief executive of Saronic Technologies. “Which means that our allies need the same capabilities. They’re thinking about reindustrializing and manufacturing the same way that we are.” – Keerthi Vedantam
Private Credit Leaders Stand in Defense
Private credit heavyweights want to put the $3 billion industry’s recent woes in the rearview.
Investment fund managers, executives and advisers defended the hot-topic sector, which has faced a barrage of scrutiny since late last year. Investor concerns about borrower creditworthiness, weak underwriting standards and the threat of AI to software-driven loan performance have given private credit a steep public-relations hill to climb.
Despite a new study from the Financial Stability Board warning of vulnerabilities in private credit, opaque valuation practices, and its interconnectedness with broader financial markets, conference panelists representing direct-lending giants maintained that the sector is on solid ground.
“I’m just not seeing that there’s a systemic problem here behind this,” said Molly Duffy, global head of financial sponsors coverage for London-based Standard Chartered Bank.
For Duffy and others, the 2008 financial crisis – driven by loose lending and cheap credit – served as a key reference point.
“There’s a big difference between what you saw in the financial crisis – you had a lot of concentration, and I think there (are) many more players now,” Duffy said. “It’s much more distributed in terms of the risk.”
So far, private credit defaults have stayed low, even among software-as-a-service companies that attracted aggressive, high-leverage lending ahead of the widespread launch of the generative AI tools now rocking the sector.
“There have been lending practices in direct lending and private credit that were more egregious than in other areas,” said Brad Rogoff, Barclays’ global head of research, noting that lenders’ exposure to software is a “problem.”
Investor outflows
Spooked by market volatility and artificial intelligence-driven uncertainty, retail investors who once flooded into private credit vehicles raced to withdraw at record volume, only to be blocked by funds’ redemption caps.
Investors expected funds to be more liquid than they are, creating an asset-liability mismatch – but the issue is “clearly not systemic,” Rogoff said. Tweaking how direct lending is presented to retail investors can reduce distrust and confusion, panelists agreed.
Their suggested first step? Doing away with the misleading “semi-liquid” moniker used to describe the funds that attracted a boom of individual investors, many of whom overestimated how easy it would be to pull their money out when they wanted.
“My belief is that a lot of these products were sold for very high commissions,” said Jeffrey Gundlach, chief executive of downtown-based investment manager DoubleLine. “I have a feeling that the financial intermediaries – not all of them, of course, but enough – didn’t explain, and I think many of the owners of these interval funds thought they could get all their money out of every quarter.”
Leaning into direct lending
Despite investors’ dampened confidence in the private credit model and a challenging fundraising environment, some money managers are leaning further into direct lending.
Last year, New York-based Third Point hired a handful of private credit professionals and expanded its direct lending strategy. Daniel Loeb, the hedge fund’s chief executive and founder, said in a panel discussion that the move was well-timed and well-funded with firm capital. Investor appetite for the strategy hasn’t been tested yet, he said.
“We have a clean portfolio. We don’t have any legacy positions to worry about,” Loeb said. “We can get started at a time where underwriting is better, and it’s a good return.”
In February, insurer Kuvare entered private credit by acquiring a $1.4 billion loan portfolio from leading direct lender Blue Owl Capital. The sale provided much-needed liquidity to Blue Owl, which has recently faced redemption requests from private credit investors.
“This is the power of having a strong, long-duration, long-term balance sheet,” Dhiren Jhaveri, Kuvare founder and chief executive, said during a Wednesday panel. “We have the benefit and curse of trying to figure out how to invest $6 billion of policyholder premiums every year.”
The transaction brought Kuvare a positive 5.4% return – a “very strong financial outcome for our balance sheet,” Jhaveri said. The company is working with regulators, he said, to monitor its private credit exposure.
The U.S. Securities and Exchange Commission has kept a close watch on the sector. SEC Chair Paul Atkins told Milken attendees Monday that the agency is investigating allegations of fraud in the private credit market.
Notwithstanding a handful of bad actors, Atkins said direct lending is a critical source of capital for small and medium-sized businesses underserved by banks. He said the SEC is collaborating with the Department of Labor on a proposed rule to ease access to private lending for 401(k) plans.
“The good thing about private markets is that they exist,” Atkins said. – Christina Chkarboul
