Thursday, April 29, 2010

PEU Bulls Are Back!

The Milken Institute wrapped up this week. The Milk 'Em boys, also known as private equity underwriters (PEU's), noted the fast return to good times:

The economy may have entered a slow recovery, but the market for private equity has snapped back so dramatically that buyout firms are struggling to find bargains. "There are still opportunities, but a lot of the low-hanging fruit is gone," said Leon Black of Apollo Management.

Unlike a year ago, when uncertainty was rampant, Black and other industry leaders were bullish on the U.S. and global economies: "The market is telling us things will get a lot better," said David Bonderman of TPG Capital. "Leverage is back in a significant way, at least for good companies, and the bond markets are white hot."

What's driving the good times? Underfunded pensions, themselves a victim of the meltdown. PEU's issued $2.8 billion in capital calls to CalPERS during the crisis. The Milken report states:

Public pension funds, the backbone of the private equity industry, will be compelled to invest more in the asset class to achieve the high rates of return necessary to prevent government and employee contributions from rising.

"Equity returns over the past decade were effectively zero," noted Bonderman. "But they know that if they want to hit their bogey's, they'll have to shift more funds away from fixed income. In time, it will turn out to be a good thing for private equity and other asset classes which tend to outperform, especially if you believe inflation is coming."

What if pension funds roll the dice and lose? Defaulted pensions end up in the taxpayer's pocket.

PEU legends Leon Black of Apollo Group and David Bonderman of TPG shared their wisdom. Unremorseful PEU giant David Rubenstein of The Carlyle Group spoke in Sweden. All should cheer their exclusion from Obama's financial regulatory reform.