Private Equity: Rebalancing Risk

Fundraising and Capital Flows

• Apollo Global Management raised its most recent fund with significant international participation, shifting from a historically U.S.-dominated LP base (two-thirds) to approximately 40–45% U.S. and 55–60% international (Mideast, Far East, sovereign funds).
• Apollo's fundraising success was driven by a differentiated value story, strong realizations (IPOs, sales), and a favorable public market environment that allowed for the sale of 11 portfolio companies in 2013 alone.
• Over the last two years, Apollo realized $26 billion compared to deploying only $3.5–$4 billion, resulting in a 5-to-1 sell-to-buy ratio due to high valuations and the availability of capital.
• Institutions supplying capital to private equity have received distributions exceeding their commitments for three consecutive years, reducing the pressure to deploy "old" capital quickly.

Market Valuations and Investment Environment

• Private equity deal multiples for transactions over $500 million are at approximately 9.5x EBITDA in the U.S., with European multiples even higher despite lower growth rates.
• Low interest rates have created a "covenant light" environment with abundant dry powder, leading to a general consensus that it is currently a better time to sell than to buy in the U.S. and developed markets.
• David Bonderman (TPG) and Jonathan Nelson (Providence Equity) noted that while valuations are high, specific sectors remain attractive, including energy/natural resources (due to the shale revolution) and European special situations driven by bank deleveraging.
• Leon Black (Apollo) identified a potential mispricing in fixed income yields relative to public equities, citing an example where a portfolio company (National Vision) was financed at 8.5x EBITDA yielding 4.5%, versus Walmart's combined 5% yield from dividends and buybacks.

Emerging Markets (EM) Strategy and Debate

• A debate emerged regarding EM returns: Jonathan Nelson argues that EMs underperform developed markets on a risk-adjusted basis despite higher GDP growth, suggesting current allocations are driven by asset allocation mechanics rather than return potential.
• David Bonderman counters that EM equity returns are often leveraged in developed markets but not in EMs, making direct comparison misleading; he emphasizes that investors must price in political, currency, and governance risks.
• Leon Black (Apollo) largely avoids EMs, viewing them as "growth plays" rather than value investments and citing risks associated with minority stakes and lack of operational control when management changes are needed.
• John Donahoe (Leonard Green) and Jonathan Nelson (Providence) invest selectively in EMs (e.g., Vietnam, Indonesia, Brazil, China) by leveraging sector-specific expertise (media/telecom) rather than providing generic capital.
• Providence Equity Partners highlighted the Aereo Supreme Court case as a binary risk that could erase $2.5–$3 billion in EBITDA for networks if the company is allowed to operate, likely favoring the networks' position.

Sector-Specific Trends and Opportunities

• Media & Telecom: The Comcast-Time Warner Cable deal is viewed as pro-consumer and competitive, though it forces content creators to reassess their scale.
• Consumer Retail: John Donahoe noted that while retail same-store sales have been positive since 2008, growth is slowing in 2014 due to weather impacts and the shift to online shopping, creating uncertainty.
• Sports: The panel discussed the Donald Sterling/Clippers controversy, agreeing that professional sports teams are generally owned by individuals, not funds, due to the unique cash flow dynamics of media rights and the difficulty of "harvesting" sports assets via standard PE cycles.
• Disruptive Tech: TPG's growth fund invests in disruptive companies like Airbnb, adopting a "ask for forgiveness, not permission" strategy regarding regulatory hurdles.

Forward-Looking Statements and Macro Outlook

• Leon Black does not expect a significant rise in interest rates before the end of 2015, citing Federal Reserve policy continuity under Janet Yellen.
• Europe is expected to remain in a low-growth environment for the foreseeable future, but bank deleveraging offers high-risk, high-yield opportunities (15–20% debt returns) in Spain, Ireland, the UK, and Italy.
• Emerging market capital inflows are increasing faster than deal availability, particularly in regions like Africa, which some panelists view as a potential "overheated" market.
• The panel anticipates continued disruption in traditional media (newspapers, pagers) and a shift toward digital content consumption, particularly among Millennials favoring tablets over traditional TV.

Panelist Sentiments and Avoidance Areas

• Leon Black and others declined to name a specific "best" idea or "worst" sector to avoid, citing competitive confidentiality and the risk that market consensus drives prices down to attractive levels if the "worst" is identified.
• Leon Black and John Donahoe expressed hesitation regarding the overpricing in consumer retail and media sectors, though Donahoe noted they continue to find value in companies with rapid EBITDA growth regardless of multiples.
• The panelists unanimously agreed that success in private equity requires more than capital; it necessitates the ability to add operational value, specialized expertise, and strong management relationships.