Peter Smith at FT.com has some interesting comments from Stephen Schwartzman, head of the Blackstone Group, on the high prices paid by private equity firms. In short valuations are at “nosebleed territory.”
Mr Schwarzman said private equity had operated in highly favourable conditions in recent years and its returns had been âamazingâ?. But he warned of the dangers of being complacent at a time when prices continued to be driven higher.
âWe have low [interest] rates, tons of money in both the private equity and debt markets, an environment where economies are expanding, where there is real growth around the world and where there is enormous M&A activity as assets changes hands,â? he told a packed audience of buy-out executives at the Super Return conference in Frankfurt.
âBut when it ends, it always ends badly. One of those signs is when the dummies can get money and thatâs where we are now.â?
âThe torrent of money that has been unleashed is remarkable to those of us that have raised money over a long period of time,â? he said. Blackstone will shortly close the worldâs largest buy-out fund at about $13.5bn (â¬11.3bn).
Mr Schwarzman said the performance of private equity had been âmind blowingâ?. Last year, the S&P 500 index rose 4.9 per cent, compared with returns of 30 to 50 per cent for certain large buy-out funds.
âI worry a lot less about competition in our industry. There has always been competition. But nothing can solve the problem of high prices,â? Mr Schwarzman said.
âIf you create a deal at the wrong price and you then hit recession, then you start living in the world of dead money. Thatâs the sort of stuff I worry about.â?
The quote about a recession is an interesting point. It will probably take an economic hiccup to derail the private equity gravy train. Since record amounts of capital have been raised the pressure is there to invest that capital, valuations be damned. As long as the capital markets are open to these borrowers the private equity boom will continue, that is until it ends.