Joseph Baratta, who runs the private-equity business of Blackstone Group LP (BX), said the stock market rally that helped firms exit investments may last two more years, as long as the Federal Reserve provides support.
Equity markets aren’t overvalued when measured by the prices buyout firms are paying for companies, Baratta said today in an interview with Stephanie Ruhle and Erik Schatzker on Bloomberg Television’s “Market Makers.” Equity values may continue to experience compound annual growth of 8 percent to 10 percent for another two years.
“The fundamentals of the U.S. economy are strong, sentiment is very positive, earnings have been growing, the Federal Reserve is quite accommodating,” Baratta said about the rally. “I think that will last as long as the Fed keeps pumping money into the credit markets.”
U.S. stocks have gained 25 percent this year as the Fed pumped $85 billion into financial markets every month through asset purchases known as quantitative easing. The rally has paved the way for a spate of profit taking by private-equity firms, with Blackstone selling about $10 billion in assets in the past 12 months, according to Baratta.
It’s not a mistake for many investors to be betting on stocks, Hayman Capital Management LP’s Kyle Bass said in a Bloomberg TV interview broadcast today.
“Equities are the natural place for pensions and hedge funds to congregate around,” Bass said.
Baratta said he worries that higher interest rates and weaker markets five years from now could make it harder to profit from selling investments. With the Fed expected to begin scaling back its policy of quantitative easing, Blackstone is seeking deals that require less debt financing.
“The next buyer will have less access to capital and it will cost more,” Baratta said. “So we need a bigger margin of safety” in pricing the buyouts Blackstone does today.
Private-equity use cash and debt to buy companies and then seek to boost earnings and sell the holdings three to five years later for a gain.
Industry executives from Apollo Global Management LLC Chief Executive Officer Leon Black to Fortress Investment Group LLC Co-Chairman Wesley Edens have said the Fed-fueled market rally makes it an ideal time to exit investments.
“It’s almost biblical: there is a time to reap and there’s a time to sow,” Black said at a conference in April. “We think it’s a fabulous time to be selling. We’re selling everything that’s not nailed down in our portfolio.”
Blackstone has taken public five companies in 2013, including SeaWorld Entertainment Inc. (SEAS) and hotel owner Extended Stay America Inc.
Blackstone plans to raise as much as $2.4 billion in an initial public offering of Hilton Worldwide Holdings Inc., the hotel chain it bought in 2007 for $26 billion, according to a regulatory filing this week.
Baratta’s group oversaw $62.6 billion as of Sept. 30. Blackstone, the world’s biggest manager of alternative assets including real estate, hedge funds and private equity, had $248.1 billion in total assets.
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