With the industry enjoying a golden period, what’s set to shape the agenda as we head into next year? The Financial Times’ Gideon Rachman and The Carlyle Group’s David Rubenstein considered the factors at SuperInvestor 2019, outlining their views on the economic and political environment, and what that means for the industry.
While the economy and the private equity industry are in good shape, there are some risks that could send it off track as we head into next year and beyond.
That’s the view from SuperInvestor 2019 in Amsterdam. Gideon Rachman, the Financial Times’ chief foreign affairs commentator, focused his address on the trade tensions between the world’s two largest economies, and on the potential rise of what he called the “populist left,” while David Rubenstein, co-founder and co-executive chairman of The Carlyle Group said he is optimistic about the future, while also being mindful of some potholes.
Gideon Rachman, Chief Foreign Affairs Commentator at Financial Times, joined us for an exclusive interview to discuss the economy disruptors as we head into 2020.
After many consecutive years of unprecedented success for private equity, there are questions about how long this period can continue as prices rise, China and the US continue their disputes and the global economy slows. While it is almost inevitable that the bull market will end at some point, how both general partners and limited partners respond will define their future.
“The industry is in reasonably good shape,” Rubenstein told the conference. “People think the industry going to produce pretty good rates of return, more and more money is coming in. But there’s no doubt that we do have some issues we have to address, they are related to image, related to the high amount of dry powder and return expectations which look pretty high.”
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Since we’re now more than 10 years into a growth cycle, Rubenstein said recession would come at some point but that he didn’t think it would happen in 2020. Instead, The Carlyle Group sees low growth, of just below 2% in the US and a lower rate in Europe. China has been growing at around 5.5%-6% and is likely to continue in that direction, he said.
On monetary policy, the US Federal Reserve will probably hold back on cutting interest rates again so that it has some ammunition left if there is another recession, the European Central Bank is likely to continue its strategy of supporting the economy and China won’t do much more easing on the policy front.
One of the key questions Rubenstein said he gets asked is on national debt levels.
“There is a lot of debt, maybe too much debt,” he said. It is manageable in the current climate of low interest rates, but should rates start to rise it could become more problematic, he said.
Rachman focused his attention on the relationship between the world’s two largest economies – China and the US – which he described as “very troubled.” The two countries have been embroiled in a trade war for almost 18 months and Rachman said that even if there was some sort of deal done, the underlying tensions would continue to simmer.
“The nature of the relationship has changed quite fundamentally and we’re not going back,” he said. “There will be an increasing separation and how far that goes is the biggest theme in politics.”
The rivalry isn’t just based on trade, he said, but a more wide-ranging strategic rivalry that could last for 20 years. “Technology is at the centre of the debate,” he said. “It’s not just business, it’s a question of national security.”
Rubenstein was more sanguine, saying it’s in the interests of US President, Donald Trump, to get a deal done before the election in 2020.
Both speakers underscored the political risks. Rachman said that alongside the trade war, the changing nature of populism was another major theme, specifically the rise of the popular left, which could threaten capitalism and private equity.
“More things are coming that spell challenging times ahead,” he said. “It’s going to be a challenging time for global finance.”
That could have a direct impact on private equity, with US Senator Elizabeth Warren, a candidate for the Democratic Party nomination, already attacking capitalism and planning to introduce legislation to regulate the industry more forcefully.
Other political factors that may be destabilizing are the outcome of Trump’s impeachment trial, the UK political turmoil and exit from the European Union, tensions between China and Taiwan, and the protests in Hong Kong.
But what of private equity?
“If the economy does slow down it will be more challenging for the existing deals we have in the portfolios,” Rubenstein said. “That will be challenging in terms of exits and returns.”
Prices in the industry are high, pushed up in part by low interest rates, and that could limit returns. There’s also a lot of unspent cash looking for a home, with dry powder estimated to be well in excess of $2 trillion, which will probably keep upward pressure on prices.
On the positive side, investors have cash at their disposal to redeploy and private equity returns have consistently outperformed public markets, making them attractive. And having a longer duration allows the industry to ride out political fluctuations, low growth and low interest rates.
“The economy is going along at a reasonable pace, it’s not likely to go into recession territory,” Rubenstein said. “The geopolitical events are manageable. We don’t know whether something unforeseen could happen but generally what we see on the horizon is manageable.”