Private equity bosses are finding history a poor guide as they search for clues on how to weather the turmoil in global markets.
Industry leaders were in a sober mood as they met at the SuperReturn International conference in Berlin this week to discuss a host of challenges, from runaway inflation and rising rates to war in course of Russia in Ukraine and the looming threat of recessions.
“I don’t think there’s a playbook we can turn to since the global financial crisis or the dotcom meltdown or whatever,” said Matt Cwiertnia, co-head of the private equity at Ares Management Corp., to participants.
“You need to be paranoid now and get in touch with your businesses early to help them through this.”
This year’s conference drew more than 3,000 people – the largest number ever – and a common remark from those who took the stage at the InterContinental Hotel on Budapester Strasse was that few people in the room will have had the experience of investing in a recessionary environment. .
“These are new things that people are dealing with,” said Nikos Stathopoulos, president of Europe at BC Partners. “We’ve never had inflation and I’ve been in this industry for 25 years.”
More than a decade of aggressive fundraising and loose monetary policy has fueled a boom in private equity deals that has allowed many companies to feel comfortable spending big in an ultra-competitive market for assets.
This led to exorbitant valuations which were described as “bananas” at the last SuperReturn meeting in November.
The multiples paid for growth at the top of the market, which General Atlantic’s Europe, Middle East and Africa head Gabriel Caillaux put at “three or four” times what a company would be willing to spend today, could start becoming an albatross for the industry.
“I think those who hadn’t adjusted their underwriting decisions during this time are going to wake up with terrible hangovers,” Caillaux told a panel this week.
These expensive transactions were financed by an abundance of easy credit when banks were happy to lend before selling the risk.
But the fear of a recession is hurting demand for leveraged loans and raising fears that banks may be stuck with unsellable debt. Even the likes of JPMorgan Chase & Co. are pulling business.
“A lot of people in this room have never invested in an inflationary, rising rate environment because the cost of capital has been zero for 14 years,” said David Sambur, co-head of private equity. at Apollo Global Management Inc. .
“We have always maintained our buy price discipline, which is why we believe we are well positioned for this emerging cycle.”
The more difficult area of financing has forced buyout companies to turn to private debt funds for loans. Michael Arougheti, chief executive of Ares, told SuperReturn that he expects these credit specialists to outperform private equity as an asset class this year.
Look for diamonds
Admittedly, the value of private equity deals remains high relative to historical averages. And while finding new capital from investors is getting tougher, there’s still enough money and risk appetite in the industry to seek out opportunities amid the dislocation.
“A good macro environment is not necessarily a good investment environment and vice versa,” said Marco De Benedetti, co-head of European private equity at Carlyle Group Inc. “We remain quite bullish on the pipeline, especially on carveouts.”
Leaders of other companies are working with each other and with the management of their portfolio companies to re-evaluate goals for the next year or two in light of the changing macroeconomic environment.
“It’s very important not to panic,” Balderton Capital partner Shikha Ahluwalia said in an interview. “Diamonds are made under pressure.”
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