Blackstone, Carlyle braces for private equity ‘terrible hangover’

Despite the sunny weather, the outlook this week was less rosy in Berlin, where the private equity sector gathered for its annual industry summit.

In a week when the S&P 500 stock index fell into a bear market and both the US Federal Reserve and the Bank of England raised interest rates, buyout bosses gathered in the German capital to discuss rising inflation, geopolitical turmoil and recession fears.

“The place to start is to think about the regime change that is taking place,” said Blackstone President Jonathan Gray.

“We are leaving what most of us have experienced in our investment careers, which is falling inflation and falling interest rates, which bottomed out sometime in mid-2020, and we are moving into a world that is very different.”

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In an era of high inflation and rising interest rates, Gray said markets like real estate and infrastructure are becoming more attractive.

“Hard assets with less exposure to input costs and favorable short-term revenues: that’s what you need in these kinds of environments.”

He said Blackstone has signed five deals this year between $8 billion and $50 billion, all hard acquisitions, ranging from an Australian casino company to a US student housing operator.

“Since we were last together… we have seen the market environment change significantly,” added Ruulke Bagijn, head of Carlyle’s global investment solutions segment and chairman of AlpInvest, in her opening speech at the conference.

“We see the effects of inflation in both our daily lives and the deal environment.”

Debate over valuations also dominated the agenda.

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Gabriel Caillaux, head of EMEA at General Atlantic, said on a panel that buyout stores that paid high prices for businesses, especially last fall, will come under pressure as the economic outlook deteriorates.

“Those who hadn’t adjusted their underwriting decisions during that time will wake up with a terrible hangover.”

He added: “The biggest question was when the music would end, and in a way it’s healthy it is.”

The future of fundraising also came into the picture.

Philipp Freise, co-head of European private equity at KKR, commented: “Tax support was unprecedented and we knew it had to be withdrawn, but to start a war, [that was] a real black swan that would multiply energy prices and disrupt geopolitical stability.

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“So of course the party is coming to an end in the sense that people are reducing the average holding period of their funds, they are trying to increase their fund in a short period of time, and that’s overwhelming for the system, especially at a time when you have such a crisis.”

Freise added: “In many ways, this is a time of reckoning for our industry, where we need to show more than just investing acumen. We also need to show that we can transform companies.”

This article was published by Private Equity News.

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