Earlier today, as part of a private event, this editor was given the opportunity to speak with some of the biggest names in the private equity world, including Carlyle cofounder David Rubenstein; Steve Pagluka, co-president of Bain Capital; Jean Salata, CEO and founding partner of Baring Private Equity Asia; and Sheela Patel, Vice President of B Capital Group and formerly President of Goldman Sachs Asset Management.
We covered a lot of ground, from how interested Carlyle and other firms are in blockchain technologies (reaction here was a bit mixed), to how focused they are on sustainable and socially responsible investing. On this front, Rubenstein claimed that “private equity people are very focused on this,” and predicted that when “within the next five years” a financial metric to better assess companies on this front If it emerges, it will become a regular factor in evaluating companies.
Patel – who previously served on Goldman’s Inclusion and Diversity Committee – agreed that it is impossible to measure the so-called ESG criteria by taking into account a third of investors right now (though he expects this to change quickly).
Naturally, we also discussed the current market, including how investors differentiate their firms’ offerings when everyone has a money cannon these days – and how long they expect to operate at hyperspeed. Huh. In feedback that may surprise some readers and will seem obvious to others, PE execs suggested that this go-go market could easily continue into 2023 if not beyond.
Only event attendees will have access to the full interview, but here are some notes from this last part of our discussion:
[P]The reason we are doing so well is the massive government intervention, which I think was necessary. As it starts to subside, we can see its effect. The unemployment rate is just over 5.2% right now, which, to me, is surprising in the midst of a pandemic, and there seems to be a lot of jobs still unfinished. part of it because [government] Pay came up, and fewer workers were looking for work, so we can see unemployment going down as those pay stops, and the impact of that is going to be a significant issue.
They say this is the best of times and the worst of times. This is the best time for investors, because if you are in the tech world, if you are in the investment world and you are investing in India, China and the United States, you have made a lot of money and you start thinking. that you are a genius because you have earned so much money, and you do not realize that this is the worst time for those who do not have internet access, [or who] Work with your hands, not your mind [or who] are not educated [or] There is childcare. In fact, in the United States and probably other parts of the world, we are building further and further [an] Unfortunately there is economic division and greater income inequality and lack of social mobility, and this is a real problem.
For those of us who have had the best of times, something will finally come to an end. At some point, the Federal Reserve will raise interest rates — maybe not until 2023, but probably before — and at some point, people start saying, ‘I’m taking more of my chips off the table. I am not going to invest that much on these valuations. just got my call this morning [regarding] A small deal in Asia where people want to pay 25 times the estimated revenue.
You can’t separate the context of where we are with interest rates and where valuations are. At some point, interest rates are going to go up, but for the moment, we have a Fed that has bought something like $4 trillion worth of bonds over the past 18 months. I think right now, $120 billion a month is going into the system, which is a depressing rate. [Meanwhile] People need to find a home to generate some kind of return for their investment, [meaning] Pension funds, endowments, individual investors.
If you look at today’s valuations, they are probably in the 99th percentile or close to the peak as far as multiples go. But if you look at them relative to rates and earnings yield, say 10 years less [Treasury] The rate, I think it’s probably only in the 20th or 30th percentile—it’s something like that. And as I look at 1999 and 2000, which I lived in and barely survived, the difference today is that although evaluations are the same in terms of multiples, in terms of multiples, [that] Then interest rates were around 5% or 6%, and today, they are 1%. That is a big difference.
There are structural things going on as well, and it comes back to the point about income inequality which is a huge issue everywhere in the world, including China, and is self-perpetuating. People with financial assets are benefiting from it [the Federal Reserve’s bond purchases]. Valuations are going up, and then people who have all that money save more, so savings rates are going up, and as you save more because you don’t need to spend that much money, [that cycle] Lowers rates even further. [So] I believe whenever the Fed starts reducing and starts reducing [how much it’s spending on bonds], you will see that rates remain lower than before, which may support higher valuation levels for some time.
If you look at the rising national debt, if you applied an interest rate of 5.5% on it, the interest the government would be paying would be close to half the budget. That’s why I don’t see politicians saying, ‘We are going’ [raise interest] Rates really high.’ Instead, they’re going to keep them down for as long as they can, because if rates become historic the taxes will go up a lot. [levels]. They can handle the expense because the rates are so low, so you’re going [continue to] Look for the low interest rate trends that drive these valuations.