Conference Presentation, Panel
The Age of Private Equity and Credit
Milken InstituteJim Moglia, Glenn August, Victor Khosla, Greg Lippmann, Virginie Morgon, Raymond Svider
- Capital migration from public to private markets is projected to persist as a structural evolution, with IPO activity anticipated to remain 70% below 1990s averages while transaction sizes expand into the hundreds of billions, causing companies to remain private longer.
- The $5.7 trillion private capital inflow since 2009 is expected to mirror growth trends in private credit, which will continue to disintermediate commercial banks in the mid-market loan sector through the entry of institutional capital.
- Remaining public equities are forecast to increase in value at an accelerated rate, driven by a market focus on large, simple, and liquid assets as complex transactions migrate to private venues.
- Investors seeking annual returns in the 6% to 8% range are expected to increasingly allocate to private credit and private equity, deeming core fixed income and public equity yields insufficient for target goals.
- Private credit growth is anticipated to continue over the next few years, offering 8% to 12% unlevered returns with enhanced downside protection relative to private equity.
- Distressed debt strategies face intensifying competition from larger firms, necessitating differentiation through direct sourcing and in-house operating capabilities.
- Private debt expansion is expected to serve as a strategic synergy for private equity firms, responding to institutional demands for integrated relationships with single partners capable of providing flexibility.
- The current market cycle is characterized as late-stage, raising risks that lending to businesses with $10 million to $30 million EBITDA lacking competitive moats could result in negative outcomes if the cycle turns.
- A liquidity-driven crisis is forecast to occur frequently without a traditional recession, driven by mismatches in liquidity as daily redemption ETFs face shrinking demand-side capital.
- During liquidity mismatches, high-yield spreads are projected to potentially widen to 900 or 1,000 basis points, even within a reasonably performing US economy.
- Distressed investing is expected to evolve from transactional flipping to operational control, with firms aiming to act as active "eagles" to improve mismanaged businesses.
- The addressable private equity market is anticipated to exceed 2007 levels due to a doubling of companies under private ownership, despite dry powder levels remaining similar to that period.
- Private debt is projected to rise significantly as companies prioritize flexible, partnership-based funding models over traditional bank pools.
- Distressed investors remain essential for heavily disrupted sectors with gross capital, ensuring that the market avoids a repeat of 2009 conditions.
- Industry leaders warn that a 2009-style correction could recur if firms fail to recognize the changing environment and maintain excessive risk aversion or a lack of auto-realization.
- ESG and diversity initiatives are expected to drive long-term returns, with firms leveraging these factors to implement dollar-driven approaches with corporate leadership.
- Investment firms are expected to maintain segregated management structures for private debt and real estate to preserve partnership DNA and facilitate organic synergies.
- Diversification across adjacent strategies such as private debt, private equity, and real estate is expected to generate more resilient returns and mitigate industry failures.