Private Equity Titans Dance Until the Music Stops in the California Sun

At 7 a.m. on Monday, Marc Rowan, managing director of private equity group Apollo Global, took the stage in Beverly Hills and warned his financial colleagues that a decade of nearly unbroken dynamism in financial markets was coming to an end. .

Stock markets would continue to fall, Rowan told the Milken Institute global conference, as soaring inflation wreaks havoc on the global economy and the US Federal Reserve is forced to respond by raising interest rates. interest.

“There’s more than one correction ahead,” said Rowan, whose firm manages $513 billion in assets. “We are way off the averages and medians,” he said, referring to stock market valuations. “In the credit market, we also have a long way to go.”

It was a stark contrast to the mood just seven months earlier at the same venue, the Beverly Hilton, when dealmakers gathering for the Milken Institute’s October conference celebrated soaring financial markets and activity record of corporate mergers and private equity buyouts.

Now, top executives at Apollo, Guggenheim and Bridgewater have peppered their talks with “recession”, “correction”, “a dark place”. It was reminiscent of the unease of 2008 when they could feel the music about to stop.

“We are emerging from the mother of all happy hours with negative interest rates and massive government spending supporting the economy and reducing risk,” said Mathieu Chabran, co-founder of private equity group Tikehau Capital. “Now we’re all dealing with a huge hangover.”

Investors can no longer rely on ever-higher trading multiples to generate their profits. Lenders, meanwhile, are poised to cut unprecedented cash flow available to fund corporate takeovers as credit conditions tighten.

Marc Rowan, right, at the Milken Institute conference on Monday. “We come out of every happy hour mother,” he said © Lauren Justice / Bloomberg

Much of the pessimism stems from events that few negotiators could have foreseen, such as Russia’s invasion of Ukraine, which sent energy and fertilizer prices skyrocketing, leading to inflation that could plunge the economies of Asia, Europe and Africa into recession and stall growth in the US.

With inflation well above a 2% target, the Fed is raising interest rates, a move many fear could lead to a recession.

“The Fed is going to have to be super aggressive,” said Scott Kleinman, co-chairman of Apollo. “They will trigger a recession before allowing inflation to run away.”

Bridgewater’s top strategist Rebecca Patterson, on the other hand, warned of the threat of stagflation as global trade comes under fire. She said she left the IMF and World Bank spring meetings last month “in a dark place”.

The threat of a slowdown has already rattled the junk bond market, a key source of funding for buyouts. Many participants anticipate a slowdown in leveraged buyouts as lenders reduce their exposures.

“It feels like a reassessment of credit risk at the start,” said Todd Lemkin, chief investment officer of Canyon Partners, who said bank risk committees were likely to reduce their funding commitments. “The party seems to stop or stop, at least for a little while.”

Todd Lemkin during a panel discussion with Rebecca Patterson
Rebecca Patterson of Bridgewater in discussion with Todd Lemkin of Canyon Partners. She left IMF and World Bank spring meetings ‘in a dark place’ © Milken Institute

Private equity firms have signaled concern that the influx of cash into the buyout industry is slowing.

As one prominent marketer noted, there are more than a dozen private equity firms trying to close new fundraising rounds of $15 billion or more. At the same time, investors have reduced their holdings of public stocks significantly and at a much faster rate than their private portfolios, making them more than ever overexposed to redemptions. Apollo recently warned that its new private equity fundraising will take longer than expected to close.

By the pool, it didn’t look so gloomy. Around noon on Monday, Leon Black, co-founder of Apollo Global, was eating a sandwich at a table with Nelson Peltz, the billionaire activist investor, and his lieutenant and son-in-law Ed Garden.

Financial industry titans such as Black and Peltz regularly travel to Beverly Hills to attend the conference, hosted by junk bond pioneer Michael Milken, who made his career in the 1980s at investment bank Drexel Burnham Lambert.

Drexel went bankrupt in 1990 when Milken pleaded guilty to violating securities laws, but his financial innovation became an unstoppable force. Takeovers financed by junk debt, fueled by an era of rock-bottom interest rates, now represent a market of more than $4 billion.

Howard Marks, left, with conference host Michael Milken
Howard Marks, left, with conference host Michael Milken. The more than three-decade bull market in subprime debt has made them both billionaires © Lauren Justice / Bloomberg

On Wednesday, Milken and Howard Marks, the co-founder of Oaktree Capital, reminisced about past funding such as sewing machine maker Singer and machinery giant International Harvester. The agreements date back to the last time inflation rose and the Fed cut off “animal spirits” from investors.

As the pair recalled the days just before a more than three-decade bull market on risky debt that made them both billionaires, Fed Chairman Jay Powell announced a 50 basis point increase in interest rates and announced further rate hikes to come.

Many young participants have never experienced such a market.

“If you’re under 34, you’ve never invested in your career in a rising rate environment or a bear market environment,” Apollo’s Kleinman said. His boss Rowan said he carried a running joke inside the company: “You’ve worked for me for 10 years and I still don’t know if you’re a good investor.”