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.

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

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.

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

WHAT IS CHANGING For years, transformation was a slide in the strategy deck. Today, it’s survival. Look at what’s happening: • Philip Morris International is now generating ~39% of total net revenues from smoke-free products (IQOS, ZYN), publicly targeting >50% in the coming years. That’s not incremental innovation. That’s portfolio reinvention. • PepsiCo moves into functional hydration and probiotics via PepsiCo Positive and brands like Poppi hedging against declining traditional soda occasions. • Nestlé shifts capital toward Nestlé Health Science and medical nutrition. • Danone doubles down on specialized nutrition while core dairy stagnates. • Unilever streamlines SKUs and divests slow-growth brands to focus on margin accretive categories. • AB InBev premiumizes and engineers occasion-based packs instead of chasing volume. Meanwhile, Kraft Heinz, Mondelēz International, Procter & Gamble, The Coca-Cola Company, L'Oréal, Estée Lauder, Colgate-Palmolive, Kimberly-Clark, Kenvue, Reckitt, The HEINEKEN Company, Diageo, General Mills, Conagra Brands, The Clorox Company, Keurig Dr Pepper Inc., Target,Publix Super Markets, Walmart, Amazon, Inditex, Nike, Starbucks all face the same pressure: Growth is no longer coming from the core. It’s coming from transformation. Why it matters? The old playbook was: Optimize → Promote → Expand distribution. The new playbook is: Re-architect the portfolio → Redefine the profit engine → Rebuild GTM. This is not about launching more SKUs. It’s about reallocating capital toward where margin and cultural relevance will live in 5–10 years. The Better Peer Take: Transformation is no longer optional portfolio hygiene. It is a capital allocation decision. The companies winning are not the ones protecting legacy volume. They are the ones funding the future, even if it cannibalizes the present. And the uncomfortable truth? The longer you delay transformation, the more expensive it becomes. If you were in the C-suite of a global CPG today… Would you defend the core or disrupt it yourself? Full extended analysis with data and country breakdowns available on The Better Peer Insights page: https://lnkd.in/egb5si3E #cpgnews #whatischanging #growthstrategy #transformation #gtm #margin #portfolio #fmcg #thebetterpeer #strategy #capitalallocation #emergingmarkets #usamarket #latam #hispanicmarket

𝐓𝐡𝐞 𝐀𝐫𝐭 𝐨𝐟 𝐒𝐦𝐚𝐫𝐭 𝐃𝐞𝐚𝐥-𝐌𝐚𝐤𝐢𝐧𝐠 – 𝐖𝐡𝐲 𝐃𝐮𝐞 𝐃𝐢𝐥𝐢𝐠𝐞𝐧𝐜𝐞 & 𝐃𝐞𝐚𝐥 𝐒𝐭𝐫𝐮𝐜𝐭𝐮𝐫𝐢𝐧𝐠 𝐌𝐚𝐭𝐭𝐞𝐫 🚗 Would you buy a car without checking under the hood? Of course not. So why do some people buy businesses without doing the same? Due diligence isn’t just a checkbox—it’s your only chance to spot red flags before they become your problem. A company might claim soaring revenue, rock-solid EBITDA, and a bright future, but dig deeper, and you may find: ❌ Revenue growth based on hope rather than signed contracts. ❌ "One-time expenses" that mysteriously happen every single year. ❌ Key customers leaving—right after the deal closes. Now, let’s say you’ve uncovered the truth. Does that mean you walk away? Not necessarily. It means you structure the deal smartly so you don’t overpay for empty promises. Here’s how savvy buyers protect themselves: 💡 Tie payments to actual results. Reduce upfront cash and shift more to an earnout—if the company performs, the seller gets paid. If not? No payday. 💡 Watch out for EBITDA tricks. Sellers love to make profits look better than they are (hello, capitalized salaries). Always adjust for reality. 💡 Plan for working capital surprises. You don’t want to close a deal and immediately need to inject cash just to keep the lights on. 💡 Use escrow & indemnities. If things go sideways post-close, you need money set aside to cover unexpected liabilities. A bad deal isn’t just about paying too much—it’s about paying for the wrong things. The best dealmakers don’t just negotiate price—they negotiate protection. #MergersAndAcquisitions #DueDiligence #DealStructuring #PrivateEquity #Investing

Inside an LBO Process: What the Analyst Is Really DoingYou 1) Start With Cash Flow Stability Before touching Excel, you build a view on the business. • how predictable are revenues • how volatile are margins • how the business behaved in downcycles Because leverage only works if cash flows hold under pressure. 2) You Translate EBITDA Into Real Cash EBITDA is not enough. You break it down into: • working capital movements • maintenance vs growth capex • cash taxes The focus is simple: “How much cash is actually available for debt repayment?” 3) You Build a Quick First Cut The first model is rough. • base case growth • stable margins • simple debt structure The objective is not precision. It is to test feasibility: “Does this deal work at all?” 4) Then You Start Breaking the Model This is where most of the work happens. You stress key assumptions: • revenue slowdown • margin compression • higher capex • weaker exit multiple You are identifying: “At what point does the return fall below threshold?” 5) You Work the Capital Structure You test different structures: • total leverage possible • mix of debt instruments • repayment schedules You observe: • how quickly debt reduces • how sensitive IRR is to leverage Small changes here can shift returns meaningfully. 6) You Decompose Returns You track IRR and MOIC. But more importantly, you break them down: • how much comes from growth • how much from deleveraging • how much from exit multiple Because returns driven only by leverage are fragile. 7) You Align the Model With Investment View The model is not built in isolation. It connects back to: • business quality • downside risk • exit visibility You are effectively asking: “Is this a risk we are willing to underwrite at this price?” 8) You Iterate Constantly Assumptions keep changing. • new information from diligence • updated management inputs • changing financing terms The model evolves with each discussion. It is not built once. It is refined repeatedly. Next Live Batch Starts from April 12th. EB till April 5th

A journalist recently reached out to me about the controversy around private equity and residential real estate in New York This comes at a time when policymakers in New York (and elsewhere) are starting to take this seriously, with new proposals specifically targeting institutional investors in residential real estate (see: https://lnkd.in/eECJ8A_F). Here is my take. Private equity is, at its core, capitalism on steroids. And like steroids, it amplifies whatever system it is injected into. In theory, capitalism works when markets are competitive. Firms compete, margins are disciplined, and consumers have choice. Private equity, in that setting, can play a useful role — improving operations, reallocating capital, sometimes even creating value. But take that same model and place it in a market where the consumer is captive — like housing — and the outcome is 100% mechanical. You have a profit-maximiser, armed with the best lawyers, financial engineers, and huge incentives tied to cash extraction. On the other side, you have tenants who cannot easily switch, cannot negotiate, and often cannot absorb shocks. It does not take much imagination to see where this leads. The industry will argue that it is simply following the rules of the game. That is true. But it is also precisely the problem. It has long been recognized that places where markets are not competitive the state needs to play an important role. In addition, there is a deeper paradox at play. Pension funds — representing ordinary workers — allocate capital to private equity in search of higher returns. Private equity does deliver higher gross returns. But it also charges very high fees. So we end up in a strange equilibrium. Workers’ savings are used to fund strategies that extract value from assets those same workers depend on — including their housing. Some of that value is returned to them in the form of pension performance, but much of it is absorbed along the way through fees. And so their pension is not improved much in the end. So, people get slightly better pensions, at best, but face higher rents, lower service quality, and greater financial fragility in their daily lives. The only clear winner is the PE bros who pocked millions in fees. It is, in many ways, the worst of both worlds. Private equity does not create this tension. it reveals it, and intensifies it. https://lnkd.in/eAjE2DXc

Last week I moderated a roundtable of advisors and consultants that support Private Equity. Here are the 5 of the key takeaways: 1 - Unfortunately deal volumes are down. Private equity firms are holding assets for longer. This means they must drive value from existing portfolios. so organic growth is now the big focus. 2 - Generating organic growth is harder than ever. Traditional levers are exhausted. Businesses need complex, hands-on strategies from proven operators. 3 - Funds now want hands-on advisors. They seek partners who execute, not just advise. They want tangible results and deep collaboration. Long reports are out, measurable impact is in. 4 - PE firms are moving away from generalised value creation and building specialist teams. In particular there is a focus on areas like data, AI, and go-to-market. 5 - There is an opportunity for boutique advisory firms to thrive. Funds want fewer, high-quality relationships. There is a big shift from traditional, larger consultancies.

We just released our quarterly deck on private assets, looking into recent trends, challenges and opportunities across private markets.  💡 Our main takeaway is that the outlook is looking bright—but selectivity is still needed. 𝐈𝐧 𝐩𝐫𝐢𝐯𝐚𝐭𝐞 𝐞𝐪𝐮𝐢𝐭𝐲, data from the first half of the year points to optimism, with deal activity picking up, exits stabilizing, and funding availability improving. Economic growth is consistent with a soft landing. The beginning of the Fed rate-cutting cycle should solidify the recovery trend that began two quarters ago. Investors should nevertheless remain selective with new allocations. We prefer GPs with a strong track record in value-creation tactics, a particular focus on growing margins and revenues, and an ability to secure lower entry multiples. Secondaries, meanwhile, offer good entry points and higher quality deal flow. 𝐈𝐧 𝐩𝐫𝐢𝐯𝐚𝐭𝐞 𝐝𝐞𝐛𝐭, the return of bank origination of loans to PE borrowers has put pressure on credit spreads while encouraging some flexibility in loan documents. We believe current yields and lender protections still offer an attractive risk/reward compared to high yield bonds and publicly traded loans. But borrowers’ stress is a risk that investors need to pay attention to. 🔎 We increasingly see a differentiated market subject to dispersion across loan size, sector, and seniority, as the lagged effects of higher interest rates are exerting a heavier toll in certain segments. As such we focus on areas benefiting from strong fundamentals. Our preference goes to senior, upper-middle market, and sponsor-backed loans. This approach—coupled with a focus on newer loan vintages and sectors less susceptible to cyclical downturns—should mitigate risks and take advantage of the appealing prospective returns we currently see in the market. 𝐈𝐧 𝐫𝐞𝐚𝐥 𝐚𝐬𝐬𝐞𝐭𝐬, the case for private real estate as a diversifier remains intact. The sector is still in a bottoming process but could start reaccelerating in 2025. We stay selective and focus on assets benefiting from strong fundamentals such as logistics, multifamily, and data centers. Meanwhile, we see infrastructure assets as attractive, especially those supported by government stimulus and benefiting from inflation-hedged and GDP-resilient cash flows. ⚠ When investing in the alternative space, investors must always be aware of the risks inherent in this asset class, such as illiquidity and a lack of transparency. #PrivateMarkets #Alternatives #PrivateEquity #PrivateDebt #RealAssets