Jun 16, 2022
Private equity faces 'crisis of value' over inflated prices
KKR's Freise on Inflation, Central Banks, Private Equity
Private owners of assets face a “crisis of value”, after years of prices being driven higher by rock-bottom interest rates, according to two senior private equity figures.
“Right now in the private markets it has been a crisis of value,” Gabriel Caillaux, head of General Atlantic’s business in EMEA, said in a Bloomberg TV interview at the SuperReturn conference for investors in Berlin. “The excesses happened because valuations ran up and you had a whole new set of actors that came in who made the deal cycle a little bit too accelerated.”
Some deals have been mis-priced because of the sustained period of low interest rates, particularly in health and technology, Scott Kleinman, co-president of Apollo Global Management Inc. said.
“When interest rates went to zero and stayed there for 14 years, it allowed for prices to go higher and higher in the public markets and the private markets,” Kleinmain said, also in a Bloomberg TV interview alongside the conference.
“You’ve seen the S&P down 20 per cent, the Nasdaq down 30 per cent, some tech companies down 50 per cent, 70 per cent-plus,” Kleinman said. “It doesn’t mean these are bad companies, it just means that the starting point of the valuations didn’t make a whole lot of sense.”
Private equity has been among the biggest winners in finance over the past decade as investors have deployed hundreds of billions of dollars into the asset class in a search for yield. The influx of capital combined with readily available leverage led to a deal-making frenzy and forced asset prices to record highs.
With rising interest rates and the increasing likelihood of a recession, high prices paid previously for assets are likely to start eating into returns.
“I do think private valuations will fall,” Kleinman said. “The private equity industry has to return back capital to investors. The prevailing market prices when you go to sell those companies will determine what that shake out looks like.”
The tougher economy will also make it more difficult for private-equity firms to sell their assets or list them on public stock exchanges in the near term as investors adjust pricing expectations, according to Nikos Stathopoulos, a partner at BC Partners.
“Everyone is in a bit of a wait-and-see mode to see what impact this will have, mainly on valuations,” Stathopoulos added in a separate Bloomberg TV interview. “As in everything you have to adjust the valuation expectations of the buyers and the sellers and they have to converge at some point and that sometimes takes time.”
A correction to reflect the worsening economic outlook is creating opportunities for some investors in the private capital industry.
“A lot of this reset is incredibly healthy and provides a lot of opportunity,” Caillaux said. “The sell down has been completely indiscriminate to the quality of the business.”
For Apollo, as the market starts to reprice, deal flow is likely to improve as more companies consider going private as volatility increases, according to Kleinman.
In addition, a potential recession is prompting some companies to look to sell non-core parts of their businesses to shore up their balance sheets, Kleinman added.