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Buyout bosses prepare for the storm

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Despite the sunny weather, the outlook was less rosy this week in Berlin, where the private equity industry met for its annual industry summit.

In a week when the S&P 500 stock index fell into a bear market and both the US Federal Reserve and Bank of England raised interest rates, buyout bosses met in the German capital to discuss soaring inflation, geopolitical tumult and recessionary fears.

“The place to start is to think about the regime change that’s happening,” said Blackstone president Jonathan Gray.

“We’re moving out of what most of us have experienced in our investing career, which was declining inflation and declining interest rates, which bottomed sometime in the middle of 2020, and we’re moving into a world that’s very different.”

In an era of high inflation and rising interest rates, Gray said that markets such as real estate and infrastructure are becoming more attractive.

“Hard assets with less exposure to input costs and favourable short duration income: that’s what you need in this kind of environment.” 

He said Blackstone has inked five deals between $8bn and $50bn this year which have all been hard asset acquisitions, ranging from an Australian casino company to a US student housing operator.

“Since we were last together…we’ve seen the market environment shift significantly,” added Ruulke Bagijn, head of Carlyle’s global investment solutions segment and chair of AlpInvest, in her opening remarks to the conference.

“We’re seeing the effects of inflation in both our daily lives and in the deal environment.”

Debate over valuations also dominated the agenda.

Gabriel Caillaux, head of EMEA at General Atlantic, said on a panel that buyout shops who paid lofty prices for companies, particularly last Autumn, will face pressure now that the economic outlook is worsening.

“Those that had not adjusted their underwriting decisions in that period of time will wake up with a terrible hangover.”

He added: “The biggest question was when would the music end, and in a way, it’s healthy that it has.” 

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The future of fundraising also came into focus.

Philipp Freise, co-head of European private equity at KKR, noted: “Fiscal support had been unprecedented and we knew that had to be withdrawn, but then for a war to be started, [that was] a true black swan that would multiply energy prices and disrupt the geopolitical stability. 

“So of course, the party is coming to an end, in the sense that people shorten the average holding period of their funds, they try to up their fund sizes in short order, and that is overwhelming the system, especially at a time when you have a crisis like this.”

Freise added: “In many ways, this is a time of reckoning for our industry, where we have to show more than just investing acumen. We also have to show that we can transform companies.”

To contact the author of this story with feedback or news, email Sebastian McCarthy

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