Saturday, November 5, 2022

PEU Leverage Cuts One Way


Central bank tightening, led by the US, has torpedoed financial markets this year, prompting companies to slow expansion plans and halt mergers and acquisitions

William Conway, co-founder of Carlyle, said that right now or over the next year or so will be a “spectacular” time to invest even though deals will slow as sellers balk at hefty discounts

“The deal transaction volume will fall generally everywhere and particularly in developed markets here for a while,” he said on a panel in Hong Kong. 

Alternative asset managers have identified some bright spots, favoring private-equity in Japan and infrastructure investing in US and China.

If target valuations have fallen "heftily", shouldn't that also apply to private equity affiliates?  

Jim Chanos and Mike Sellers recently addressed private equity in an interview.  Sellers called private equity "levered equity."  In a rising asset environment valuations go up faster due to leverage.  The same should be true in a declining asset environment.  The Carlyle Group is yet to mark down its holdings in a significant, much less "hefty" manner.

Apparently PEU leverage only cuts one way.   That's allowed in a system where politicians Red and Blue love PEU and increasingly, more are one.

Update 11-6-22:  Nouriel Roubini wrote:

"The bubbles of private equity, property, venture capital and cryptocurrencies will burst now that the era of cheap money is over.

Update 11-8-22:  During The Carlyle Group's Q3 earnings call analysts heard:

What we've seen is that public market valuations have decreased much faster than private markets valuation.--Ruulke Bagijn

This has been a tough challenging market in a lot of fronts. But even in all of that, our funds have appreciated 10% year-to-date, which is really good. -- Interim CEO Bill Conway

Revenue growth overall has been in the low-double-digits across that portfolio. And many companies are passing on price increases, but also demand has remained really strong in most areas the economy so-far. On margins, there's clearly there is some cost pressure, so on margins, margins are growing in the mid-single-digit. --Peter Clare

The greed and leverage boys earned higher profits on the backs of customers.

As for cryptocurrencies Sam Bankman-Fried had a very bad day.  FTX sold its non-U.S. operations to Binance after a $6 billion crypto bank run.  The following statistic should be very concerning:

94% of state and government pension plans have invested in cryptocurrencies.

Update 11-29-22:   PEU lack of asset valuation writedowns can be seen in a FT article on Blackstone's Hipgnosis.  They also overstate their holdings via packaging and selling collatoralized fund obligations.