Conference Presentation, Panel, Fireside Chat
Private Equity Outlook from Industry Titans
- David Rubenstein anticipates a recession within the next two years based on historical seven-to-eight-year cycles, warns that U.S. government regulations could impair private equity operations, and fears the Federal Reserve may raise interest rates twice or by amounts exceeding expectations.
- Rubenstein predicts that if China's growth slows to 4% or 5% instead of the anticipated 6% to 6.5% over the next year or two, or if commodity prices fail to rise toward a normal range within 12 to 18 months, the global economy will face significant adverse effects.
- Robert Smith forecasts that insufficient cybersecurity management due to industry digitization will cause business collapses, while identifying indigenous firms in China, India, Brazil, and the Middle East as major future partners and drivers of growth.
- Leon Black notes that private equity valuations are priced at approximately 19 in the U.S. and in the mid-20s in Europe, with high-yield rates tightening from nearly 9% in January to about 7.5%, while debt issuance declined to $128 billion in Q1 2016 from $200 billion a year ago and $300 billion two years prior.
- Black expects private equity deal equity contributions to rise from the mid-30% to the mid-40% level, predicts transaction valuations will average low six times EBITDA against an 11x market backdrop, and forecasts the firm will deploy $5 billion in equity during the first quarter.
- Leon Black anticipates prolonged market uncertainty due to election outcomes, predicts a continued "crying need" for yields of 6% to 8% or mid-to-high teens, and projects Apollo's new MidCap unit will generate $7 billion in capital.
- Jonathan Nelson expects portfolio revenue growth to reach 14% this year, a 600 basis point increase from the previous year's 8%, while predicting that average net internal rates of return will settle in the mid-teen range, moving away from the 20% to 25% targets of the early years.
- Nelson forecasts a shift in asset holding periods from 5 to 7 years to 10 to 20 years, anticipating the emergence of long-dated funds initiated by sovereign wealth funds within the next five years and noting investment durations will extend from 4.3 to 5.3 years.
- Nelson predicts that non-accredited investors will be able to access private equity, including through IRAs and 401(k)s, within the next five years, and expects distributions to reverse the trend of net outflows starting this year as the industry enters a value-building phase.
- Robert Smith anticipates astronomical growth rates for enterprise software companies serving domestic markets in regions like China, which will benefit from private equity investment, and emphasizes partnerships with indigenous firms that consume the products of acquired companies.
- Jonathan Nelson notes that sovereign wealth funds increasingly demand co-investments, seek to embed personnel in organizations for training, and desire larger single investment commitments, viewing private equity as a long-term liquid asset class requiring 10-year capital locks.
- Leon Black projects that regulatory restrictions on banks will create opportunities for unregulated entities to provide credit, while the low-interest-rate environment drives demand for private equity's current yield and equity upside kicker.
- Multiple speakers agree that sovereign wealth funds possess significant deployable capital and prefer long-term horizons, leading to expectations that returns will likely settle in the mid-teen range, with 15% net internal rates of return considered heroic in the current 0% interest rate environment.
- Leon Black and David Rubenstein both state that sovereign wealth funds are bringing larger investment commitments than ever before, while Black warns that emerging market returns may not exceed U.S. levels despite increased capital flows, and Nelson cautions that capital supply and demand imbalances in emerging markets are depressing returns.
- Robert Smith expects the number of indigenous firms in emerging markets to grow into major factors in the private equity world, with these firms serving as primary partners for U.S. firms due to their consumption of products from acquired companies.
- Jonathan Nelson anticipates that the trend of selling will reverse as the industry moves into a planting and value-building stage, and expects mechanisms to develop allowing young GPs who do not wish to wait 20 years for carried interest to participate in long-term funds.