Carlyle Group CEO Harvey Schwartz offered in their Q2 earnings call:
...we’re in one of the most complex periods in recent economic history. The combination of sustained elevated inflation along with central bank rate hikes has led to a corresponding increase in the cost of capital. The peak of the inflationary cycle may have passed but our base case is that rates stay higher for longer as we shift away from a decade of 0 interest rate policy.
It remains early days in understanding the impact of this shift on corporate capital structures and liquidity
Apollo Global CEO Marc Rowan told FT that private equity is "in retreat."
In the [private] equity business, this year has really marked the end of an era,” said Marc Rowan, whose Apollo is one of the world’s biggest private equity groups with $617bn in assets. A decade of “money printing”, fiscal stimulus and low interest rates that had pulled forward economic demand “is in retreat”, he added.
PEUs would be forced “to go back to investing in the old-fashioned way. They’ll actually have to be very good investors,” Rowan said.
He characterised the lending as “highly complementary” to the banking system because it is coming from sources of long-term capital, versus a more leveraged bank balance sheet.
Rowan, however, warned against overconfidence in what many have dubbed a “golden age” for private debts, saying that “financial literacy . . . has actually gotten quite sloppy”.
Flashback to 2009 when Rowan said to Knowledge at Wharton:
For us at Apollo, the strategy that we have relied on for the past 20 years is distressed. Most of the founders of our business come out of the debt business. Rather than looking for acquisitions in the traditional private equity fashion during these periods of time, we employ our fixed income skill set. We go in and we buy the debt, bank debt, subordinated debt, of fundamentally good businesses that are overlevered, and we work through a process with creditors — sometimes in bankruptcy, sometimes out of bankruptcy — and we end up, hopefully, backing into control of a fundamentally good capital structure at a good price.
Lots of those should be coming. Carlyle conducted a number of back door takeovers, notably Brintons and Mrs. Fields. New CEO Harvey Schwartz wants Carlyle's credit arm to refinance affiliates worth keeping. Those not worthy will be turned over to debt holders.
Carlyle plans to garner more investment from the super wealthy.
We’ve recently hired a new Head of Private Wealth strategy. While we only have 3 products in the market covering 5 billion of assets today, we view this as an important channel for growth. We’ll be working with our distribution partners to bring product innovation globally to the Wealth Cal.
Most importantly, the Carlyle brand is a huge differentiator here.
Blackstone founder Stephen Schwarzman commented on Fitch's downgrade of U.S. debt:
The numbers justify it, regrettably. We’ve had an explosion of debt since the global financial crisis. We don’t appear to have a lot of discipline.
Schwarzman did not mention his failure to pay fair tax rates on his monstrous profits over the same period. The PEU boys were very disciplined in their efforts to keep preferred "carried interest" taxation in place. As I heard him talk one word came to mind, shameless.
NYT ran a story titled "The Risks Hidden in Public Pension Funds." It stated:
...private equity funds have made people rich — especially the people who run them. Stephen A. Schwarzman, chief executive of the Blackstone global private equity group, received $253.1 million in compensation in 2022, mostly through incentive fees and profits known as carried interest, an accounting loophole that allows private equity profits to be taxed at lower rates than the salaries of working people.
As owner of roughly 20 percent of Blackstone, Mr. Schwartzman also received more than $1 billion in dividends in 2022, on top of his executive compensation.
The story noted PEUs are "speculative and arcane asset structures with high fees, heavy debt loads and light regulation." High fees enrich PEU billionaire founders who maintain their preferred taxation.
The political background has limitations on outbound investment under consideration. Is that to steer more capital to the greed and leverage boys for lending purposes? It remains to be seen.
Politicians Red and Blue love PEU and increasingly, more are one.
