Earlier today, as part of a private event, this editor was afforded the opportunity to talk with some of the biggest names in the world of private equity, including Carlyle co-founder David Rubenstein; Bain Capital co-chair Steve Pagliuca; Jean Salata, the CEO and founding partner of Baring Private Equity Asia; and Sheila Patel, the vice chairman of B Capital Group AGM and formerly the chair of Goldman Sachs Asset Management.
We covered a lot of ground, from how interested Carlyle and the other firms are in blockchain technologies (the feedback here was a little 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 it,” and predicted that when a financial metric emerges to better assess companies on this front “within the next five years,” it will become a routine factor in evaluating companies.
Patel — who previously served on Goldman’s inclusion and diversity committee — agreed, noting upward of one-third of investors right now find it impossible to measure so-called ESG criteria (though she expects this to change quickly).
Naturally, too, we discussed the current market, including how the investors differentiate their firms’ offerings when everyone these days has a money cannon — and how long they expect to be operating at hyperspeed. In feedback that might surprise some readers and will seem obvious to others, the PE execs suggested that this go-go market could easily continue into 2023, if not beyond.
Only attendees of the event will have access to the full interview, but some notes from this last part of our discussion follow:
[P]art of the reason we’re doing so well has been massive government intervention, which I think was warranted. As that starts to wane, we may see an effect from that. The unemployment rate right now is just over 5.2%, which is, to me, astounding in the middle of a pandemic, and it looks like there are lots of jobs out there still unfilled. Part of that is because the [government] payments came out, and less workers were looking for work, so we might see unemployment continue to go down as those payments stop, and the impact of that is going to be a key issue.
They say this is the best of times and the worst of times. It’s the best of times for investors, because if you’re in the tech world, if you’re in the investing world and you’re investing in India, China and the United States, you’ve made a lot of money and you’re beginning to think you’re a genius because you made so much money, and you just don’t realize that it’s the worst of times for people that don’t have internet access, [or who] work with their hands and not with their minds as much, [or who] aren’t educated [or] have childcare [needs]. Really, in the United States and probably other parts of the world, we are further and further creating [an] economic divide unfortunately and greater income inequality and a lack of social mobility, and that’s a real problem.
For those for whom it’s been the best of times, eventually something will end. At some point, the Federal Reserve will increase interest rates — probably not until 2023, but maybe before — and at some point, people begin to say, “I’m taking more of my chips off the table. I’m not going to invest as much at these valuations.” I just got off a call this morning [regarding] a small deal in Asia where people want to pay things like 25 times projected revenues.
You cannot separate the context of where we are with interest rates from where valuations are. At some point, interest rates are going to go up, but at the moment, what we have is a Fed that has bought something like $4 trillion worth of bonds over the last 18 months. I think right now, $120 billion a month is going into the system, which is depressing rates. [Meanwhile] people need to find a home for their investments to generate some kind of return, [meaning] pension funds, endowments, individual investors.
If you look at valuations today, they’re probably in the 99th percentile or near the peak as far as multiples go. But if you look at them relative to the rates and earnings yield, less the say the 10-year [Treasury] rate, I think that’s probably only in the 20th or the 30th percentile — it’s something like that. And as I look back to 1999 and 2000, which I lived through and barely survived, the difference today is that although valuations are similar in terms of the frothiness, in terms of multiples, [that] interest rates back then were about 5% or 6%, and today, they’re 1%. That is a big difference.
There are also structural things going on, and it comes back to this point about income inequality, which is a big issue everywhere in the world, including in China, by the way, and is self-perpetuating. People with financial assets are benefiting from what’s going on with [the Federal Reserve’s bond purchases]. Valuations are rising, and then the 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] depresses rates even further. [So] I believe that even when the Fed starts to taper off and starts reducing [how much it’s spending on bonds], you’ll see rates staying lower than they have been in the past, which could support higher valuations levels for quite some time.
If you look at the ballooning national debt, if you applied a 5.5% interest rate to that, the interest that the government would be paying would be close to half the budget. So I just don’t see the politicians saying, “We’re going to [raise interest] rates really high.” Instead, they’re going to keep them down as long as they can, because the taxes will go up enormously if rates go back to historic [levels]. They can handle the spending because rates are so low, so you’re going to [continue to] see low interest rate trends, which props up these valuations.