Will Private Equity Returns Deliver as Public Markets Revert to Norm?

Channel: Bloomberg Markets and Finance
Published: 7 hours ago

Feb.26 -- Christophe De Vusser, head of EMEA private equity at Bain & Co. discusses the outlook for private versus public markets. He speaks with Matt Miller at the SuperReturn conference in Berlin with Matt Miller on "Bloomberg Markets: European Open."

Joining me is christophe de visser. He is the head of eme, a private equity at bain & company as it been capital earlier. I met bain and company the advisor who put out really the report that i think everyone's going to be talking about with harvard professor josh lerner at this conference. Saying that or at least a lot of people have taken from it that if you invested in the sp500 over the last 1 ...
years, you would have made more money than investing in private equity through june of 2019. So our public markets a better bet than private equity. Well, it's a factually right that for the first time in history on a ten-year stretch, the american public equities have outperformed to the us private equity markets and that's the first time that has happened, and so it's logical that people are wondering is private, actually actually worth The hype and the fees that is out there and we believe actually, that the public equities come out of an incredible bull ride over the last years and that the private public equities might actually return to their normal levels. If there's a recession, if there's a market correction etc, and that the private equity returns will continue to deliver a healthy double-digit returns also of the coming years, and that's what we see investors also focusing on. They continue to put money behind private equity because they believe in the returns on the longer term, that they will be able to post double-digit returns, and so, as such 2019 was a record year for fund raising for private equity yeah, we saw, i think, almost 400 Billion dollars go into private equity, almost a trillion dollars go into private assets, including real estate, and what what do investors expect out of public private equity out of private assets in a downturn that will be that will make them better off than than public markets yeah? If you look over 20 30 year period, private equity has done remarkably well during downturns. So we often say that actually during recession is the best moment to invest in private equity, because it's it's in those moments that the that the private equity markets outperform the public equity markets most, and so, if there's a dislocation, if there's a crisis somewhere. Typically, it's good moments to invest in the private equity markets. They have been incredibly resilient during during crisis. Also during the last global financial crisis, private equity still returned one point four times their money, even in the worst crisis that we've seen over the last ten years.

So the problem is, as i would see it if everybody thinks this and they all put their money into private equity, they're, all chasing the same assets right and then leveraged just i mean your report shows leverage just goes through the roof, we're at a place now, With leveraged debt that we have never seen before, yeah, that's one of the challenges. Of course: there's an incredible amount of dry powder out there, two and a half trillion in the private capital dry powder - that's out there. That needs to be put to work and that's just capital that is sitting there. That needs to be deployed looking for companies to buy yeah and that drives prices up and that's one of the challenges of private equity. That being said, 70 % of that dry powder is what we call fresh, so it just raised in the last two years and also if you look into the money, that's put to work every year, that dry powder is worth two and a half years of investment. So there's a lot of money out there, the prices are high, and so private equity firms need to be cautious on how they put that to work for sure. Also in a world that is disrupted by digital, and so it requires very smart strategies of private equity funds to look for the right targets, you know how they gon na create value to continue to post these healthy returns. Is europe a good place to look for value because valuations are so high in the us or is the negative interest rate scenario here more of a problem? Yeah private equity has done remarkably well in europe. It continues to outperform the public equity markets, as it has done over the last 10 20 years and for sure private versus public equity in europe is a good choice and private equity continues to post similar returns in europe, as it does actually in the us. Healthy double-digit over a long long time period, so private equity versus public equity for sure in europe is a good choice. Is the negative rate, our negative rates help for private equity because you can leverage up cheaper or is it a problem because everybody leverages up cheaper everybody leverages up cheaper and it's a big part of why prices are inflating because, with the current interest rates, you can Put more depth on the same company and that's actually a big part of why the multiples are being pushed up as well. So it's a good thing because you can put more leverage, it's a risky thing, because prices are inflating because of it and it's actually one of the risk.

If and the long-term interest rates would start rising again. That would be a good challenge for the private equity market.

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