The recent rise in public markets is constraining private equity activity by pushing up prices to a level that is difficult for big buyout firms to justify paying in the current environment, leading GPs said at the Milken Institute Global Conference in Los Angeles.
However, the panel of private equity bosses – which included TPG Capital's David Bonderman, Apollo Management's Leon Black, Providence Equity Partners' Jonathan Nelson, Jonathan Sokoloff of Leonard Green & Partners and Scott Sperling of Thomas H Lee Partners – argued that managers can still generate good returns even in a low-growth environment by diversifying into new strategies and geographies.
The lack of a recovery in M&A was down to the price levels sellers were seeking, based on how the public markets are pricing assets, Sterling said. Given the macro risks involved, he suggested, that has meant “there's been less of a meeting of minds between buyers and sellers as you may have expected.” The rise in markets since the turn of the year has accentuated this problem, Sokoloff added.
Europe is going absolutely nowhere forever.
Political uncertainty is also affecting the industry, it was suggested, because it increases the underlying risk attached to particular deals in countries with elections pending – like the US. However, Black argued that if Mitt Romney wins the presidential election, it will give M&A a big boost. “I think if Romney gets elected you will have a boom in the markets; there'll be a lot more optimism about growth.” Regulatory and tax pressures will also diminish, he suggested.
In light of all these factors, the best solution may be to seek out new strategies and geographies with better growth prospects, the panel suggested. “You need to look for particular areas where the wind is at your back,” Bonderman said. Black said it was about finding “new pathways to buy good companies cheaper”. In Apollo's case, this has meant a greater focus on buying distressed assets and building up its credit business.
One big advantage for the industry, according to Bonderman, is that pension funds will need to keep committing capital to private equity to have any hope of hitting their pay-out ratios – given the declining returns from equity and debt markets.
Solokoff, whose firm has just finished a successful fundraising, insisted “the money is out there” – although he admitted that the process had been “dramatically harder” than last time round.