An overheated market intoxicated by cheap credit serves as a warning to investors
There are few surer financial warnings than Stephen Schwarzman, co-founder of the private equity group Blackstone, throwing a big party. His 60th celebration a decade ago marked the pre-crisis peak for the industry, so the 70th birthday party he held last month in Palm Beach, Florida, featuring fireworks, camels, and a cake in the shape of a Chinese temple, is worrying.
Private equity entered a slump after his 2007 party, with the huge debt-financed deals struck at the peak looking stupid with hindsight. Ten years later, it is doing extremely well for itself. As hedge funds stumble and public stock markets are increasingly dominated by passive index funds, veterans such as Mr Schwarzman and LeonBlack of Apollo are masters of their universe.
It is a safe bet that this will not last, since it never has before. The global industry gathers every year at a conference called SuperReturn, held in Berlin this week. The name is not always merited but this year’s resembles a crowded party that could erupt at any moment. Cocky financiers in expensive suits, intoxicated by cheap credit and high dividends? Run for the exits.
Even this was bearable until Mr Black took to the SuperReturn stage on Monday to declare that, although a correction was probably imminent, it could be postponed by Donald Trump’s pledge of a “revved up” US economy. That could unleash a further three years of “turbocharged” growth for leveraged buyouts backed by the $820bn of capital yet to be invested. Then I really got nervous.
Private equity’s problem is not that it is suffering but the opposite: it has recovered so fully that it is flush with money. As it sells the businesses it bought a few years ago, many at a high profit, and returns cash to the pension funds and institutions that invest through it, more is arriving. This is a very good period to be selling assets but a hard one to find a bargain.
The industry should still have advantages even in these heady times. Compared with hedge funds, which also charge stiff fees to invest other people’s money, it has performed well. Warren Buffett wrote harshly of hedge fund managers in his annual letter to Berkshire Hathaway investors, but has partnered with 3G, the Brazilian-led private equity firm.
