Private Equity is Done…Well, Not Quite (Part Two)

Last week we began to respond to the WSJ op-ed by Andy Kessler in which he stated the glory days of private equity are over. We first reviewed how many ups and downs the industry has had over the past thirty or so years; at least seven stages, at the end of each of which observers could reasonably have declared private investing to be “done.”

Successful equity investors look for undiscovered value. Those opportunities abound when markets go through major corrections and are scarcer when purchase multiples soar. Today sponsors are clearly dealing with headwinds, as Mr. Kessler suggested. But to trumpet the end of days for PE misses the adaptive nature of these investors.

Yes, right now there’s too much cash chasing too few deals. But that benefits PE sellers and their LPs. Firms that show better returns will be rewarded with more LP dollars to recycle. The rest will be challenged, as always happens in periods before a shake-out.

Let’s take the first of the op-ed’s points – that rising interest rates will hurt PE. Certainly the market has been expecting higher rates for a while. And higher interest expenses do cost portfolio companies more money. But where was Libor at the peak of the glory days? In June 2007, 30-day Libor was 5.25%. Today it stands at 0.18%. If the Fed raises rates 25 bps every quarter beginning in June, it would take five years to get back to where we stood back in 2007. We think that’s plenty of time for PE to adjust their capital needs.