Investors ‘on Drugs’ as Low Rates Fuel Prices, Stahlberg Says

  • Private equity was given license to pay up: Vista CEO Smith
  • Credit investing is biggest opportunity right now: Arougheti

“We’re all on drugs.”

Jan Stahlberg, vice chairman of Swedish private equity firm EQT Partners AB, woke up the audience Tuesday at the SuperReturn International conference in Berlin as he warned the industry not to stay hooked on low interest rates.

Near-zero rates have fueled high prices globally across equity and debt markets. While private equity investors have seized on soaring markets to offload holdings and distribute hundreds of billions of dollars to clients in recent years, they now find themselves in a difficult position to deploy record levels of dry powder. And when they do, they’ve been paying for companies at record multiples of cash flow, according to consulting firm Bain & Co.

Rates globally “are so low that we are not really seeing the discipline,” Stahlberg said, speaking in an onstage interview with Bloomberg’s Jason Kelly. “The fun will continue for quite some time but it will end, and it will end badly, and there will be a hangover for all of us.”

His warning was later echoed by Robert Smith, the chief executive officer of software investor Vista Equity Partners. Vista is finishing raising money for its latest buyout fund, which has received billions of dollars in demand beyond its $8 billion target, people with knowledge of the process have said.

Low interest rates have given private equity “license to do deals they otherwise wouldn’t do,” Smith said Tuesday. “When that merry-go-round slows down I think you’ll see some real compression in returns.”

Debt Attraction

Amid shifting political and regulatory regimes, and a calm market that dealmakers say belies underlying uncertainty, Ares Management LP President Mike Arougheti called the investment environment confusing and said “people have a lot more to digest today than they used to.” Firms need to find a competitive edge in order to strike reasonable deals, Stahlberg said.

“It’s just not going out there and buying assets at today’s prices -- then you would fail,” said Stahlberg. Investors “have to find new operational value creation that other people can’t spot or can’t deliver.”

Amid challenges to making new private equity investments, Stahlberg and Arougheti named private credit as the largest opportunity. Alternative-asset managers have been snapping up debt deals after regulators clamped down on banks’ lending practices. The firms are also taking advantage of demand for floating-rate debt as investors prepare for higher interest rates.

In private equity, “we have record liquidity in the asset class, leverage is plentiful, purchase price multiples are as high as they’ve ever been, and this is all in the face of slowing growth rates,” Ares’s Arougheti said Tuesday. “For me, the illiquid credit opportunity grows far beyond just what people are seeing now.”

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