As anyone with even a passing interest knows, over the last decade, private equity has had quite a run: Deal multiples have hit record highs; while deal count declined, investment value grew again last year; and so-called “dry powder” – capital sitting ready to invest – hit a record high of $2 trillion in December 2018 across all fund types.
And yet, as always, questions remain:
- Can prices sustain their extraordinary levels?
- When PE investors run their crucial return projections – what assumptions are they making about the broader economy… or even a recession?
- And what about politics – is the industry ready for the 2020 campaign and new questions about the capitalism?
Few people follow private equity – or have more sources and resources in the industry – than Chris Witkowsky, Editor of PE Hub and Buyouts. We discussed what’s next for PE, what he hears from investors and private equity firms, and whether they believe PE’s extraordinary run can continue.
Follow Chris Witkowsky on Twitter.
Transcript: Chris Witkowsky, PE Hub & Buyouts — What’s Next for PE?
Chris Riback: Chris, thanks for joining me. I appreciate your time.
Chris Witkowsky: Thanks for the opportunity, Chris.
Chris Riback: I understand you’re coming to me from the newsroom. So first of all, I guess that means that there are actually journalists working in the background. And secondly, if news breaks and you got to run, you’ll just let me know. OK?
Chris Witkowsky: There’s a lot going on here, so hopefully it doesn’t too loud.
Chris Riback: It has been quite a run for private equity the last few years. So let’s start with your broad overview. From what you see and the people you talk with, where are we in the PE lifecycle?
Chris Witkowsky: I have been hearing for the past 10 years that we are in the late stages of the cycle, that we’re at the peak, that everything’s going downhill from here, that there’s an impending recession to be two years from now. And again, I’ve been hearing that for 10 years. So it’s kind of hard to say where are we are. I would say from people I talk to, from things I’m seeing, behaviors I’m seeing, that it really does seem like we’re at the peak, that it can’t get any more energetic, vigorous, expensive than this. But I think that every year, and the next year comes by and we see no downturn, we see no slow down. Whether that’s in fundraising, whether that’s in deal flow, whether that’s in pricing, nothing seems to be going down.
So it’s hard for me to say. I mean, I guess that I could say a with a little bit of confidence that it really does seem like the peak. There’s been so much money raised and so much money sitting, as we say, like on the sidelines or under the metaphorical mattresses. This is money that private equity funds have raised that they have not yet spent, colloquial known as a dry powder. There’s about a $2 trillion of dry powder that’s just sitting unspent since as of December. And so that that money is going to ensure that deals will continue to get done and likely will continue to get done at high prices. So I don’t see any slow down in the immediate future from my perspective.
“I have been hearing for the past 10 years that we are in the late stages of the cycle, that we’re at the peak, that everything’s going downhill from here, that there’s an impending recession to be two years from now. And again, I’ve been hearing that for 10 years….But I think that every year, and the next year comes by and we see no downturn, we see no slow down. Whether that’s in fundraising, whether that’s in deal flow, whether that’s in pricing, nothing seems to be going down.”
Chris Riback: I hear you. For about 10 years now, I guess, you’ve been just on the peak of PE, and any moment now it’s going to be on the downturn, and that’s I guess been a 10 year run as you point out. And for at least two years there’s been the talk of a recession, which hasn’t occurred. But now looking forward, I’m kind of curious about what you’re seeing, or perhaps what you’re hearing, as PE investors are running their crucial return projections. Are they assuming there will be a recession in the next five years for determining their base case returns? I mean obviously that’s a key to getting them to determine whether they do a deal or not. Do you have any sense of forward looking how folks are seeming?
Chris Witkowsky: They will tell you that. They sort of always factor that into their calculations when they’re looking at a deal. And they will also tell-
Chris Riback: Do you believe them?
Chris Witkowsky: I don’t, because honestly to me, valuations are so high and the likelihood is that five, six, seven years from now, it’s going to be a different environment. And so that you would be able to sell a company for higher than you bought it at this peak, I find that hard to believe. And so what they need to do then, of course, is find ways to grow it. And that is really the strategy now, is that they know that they’re paying high prices. And so the question is how do we grow this so that we can make more money off of it once we sell it? And so I really don’t think that they’re necessarily factoring a recession into their deal calculations. I don’t think so.
They are, however, they have for the past couple years been warning their investors, what we call limited partners. The institutions that invest in private equity funds, basically give private equity guys their money and say, “Go make us a return.” They have been telling their limited partners, warning them almost, that returns overall will be coming down. And that is because of the environment we’re in, because prices are higher, because competition is so fierce that the idea of getting sort of a exclusive deal, not having to go through an auction, not having to pursue an asset that’s being bid up. Those days are gone, or for the most part, those days are gone. Being able to find a so called proprietary deal, that’s real hard these days.
Chris Riback: I’m curious about the LPs. You wrote back in January, “From the looks of things, LPs aren’t pulling back from the asset class even a little bit.” This was back in January, of course. “We ran through some of the largest public systems in the country to find out what they’re up to. Most are either maintaining their PE pacing or ramping it up.” It’s now about two months after you first wrote that. Is that still what you’re seeing? Or, given the guidance that you just discussed, that the general partners at the PE firms might be giving their investors, is that changing a little bit, even since when you first wrote that back in January?
Chris Witkowsky: Well what I wrote in January was true, Even as GPs had been warning of falling returns for about a year and a half. And so it’s not like that sort of warning was new. LPs are fully aware of this and yet they are fully committed to this asset class. Part of that has to be because public pension systems in the US, many of them are almost at crisis level funding. They need to be able to fulfill their obligations to their retirees, looking forward years and years. And so they measure that as sort of a funding level, and many, many public pension systems in this country are well below where they need to be in order to fulfill their obligations to their retirees. And so that’s because of various reasons, because of falling investment returns, but also because states have stopped a contributing what they should be contributing to their pension plans
And so to make up for that gap, that funding gap, these pensions, maybe starting around the early 2000’s started to pour more money into riskier investments, so called a riskier investments, including private equity. And today, that that state of … That status has only gotten worse, that funding status. And so these massive public pension plans need continue to take more risk in order to get higher return. And so private equity has been performing well for them, overall. You can look at an individual plan here or there and say that, “Oh, private equity hasn’t done that well for them.” But overall, private equity has done well over the past few years.
A lot of times, a lot of measurements will show private equity will track the public markets. And so as a public market returns go up, you could see private equity also going up. But private equity overall has returned higher than public markets, depending on what measurements you’re looking at. But LPs have certainly not backed away from it. And as I wrote in January, their pacing for 2019 is either remaining the same or putting more money into private equity. And that’s definitely true. That hasn’t changed at all.
Chris Riback: I want to ask you about that public market, private market connection and how they’re tracking together or not tracking together. But first just to pick up on … You just mentioned the public pensions and a significant amount of that … Yeah, a not small issue. And obviously, a part of that, significant part of that is politics. And so I want to talk to you about American politics. The midterms saw … And private equity. And the midterms, of course, saw a big freshman class of Democrats. And they are, many of whom, are not afraid to call themselves social democrats. Now the 2020 race has started, and one of the candidates the other day, Colorado’s John Hickenlooper, a business person, he’s a small business person before he was governor, couldn’t even really answer the question of whether he’s a capitalist. What’s the political outlook for PE?
Chris Witkowsky: That’s a great question. This is probably my favorite topic, the intersection of politics and private equity or politics in Wall Street. I think it’s fascinating. And here’s the irony is that we have had a good amount of so-called populist politicians, starting with our president. And you could look at a few others who consider themselves populists, or even Wall Street reformers. And so let’s take the governor of New Jersey, Phil Murphy. He campaigned, among other things, one of his campaign promises that he was going to divest from private equity in the public pension system. He acknowledged that they have a public pension crisis in New Jersey and he had certain plans to fix that. But one of those was to stop paying high Wall Street fees. That’s kind of the catchall phrase that you hear a lot.
And so part of his campaign platform was to divest from private equity. So he gets elected and we track that pension. There’s no hint of divestment from private equity. In fact, they can’t divest from private equity because again, that portfolio has been their best performing portfolio for many years. And so that pension is in a funding crisis. It would be a mistake to get rid of private equity the way it’s performing now. Now it’s easy to go out to the voters and say, “We pay these billionaires millions of dollars in fees and for what?” But that’s not the whole story. And right now it seems like in New Jersey and some other states, private equity is really helping to keep those pensions afloat, to keep that gap, that funding gap that these pensions face somewhat realistic.
“There doesn’t seem to be any sense that it’s going to slow down. Institutional investors like public pensions, endowments, insurance companies, other types of institutions are just pouring money into the private markets and there just doesn’t seem to be any hint that that’s going to slow down anytime soon.”
Chris Riback: Do you see competing pressure? Because obviously Murphy not an unsophisticated business person himself. And so his talking about pulling out of PE, he surely knew what you just said, that from a performance point of view that would be extremely difficult to do if he has, particularly to fulfill pension obligations. And yet on the other hand almost, and I think this is one of the areas that you find yourself intellectually kind of intrigued about, I certainly do as well, an increased questioning around … Well, many, many questions around questions of equality and inequality, gaps, return gaps, income gaps, all sorts of gaps in this country that are raising some questions about the way markets are regulated, broadly overstated, say some questions about capitalism. But I think it’s more around proper regulations around tax policies and that sort of thing. Do you see risk, or from that point of view, how do you see the politics and private equity?
Chris Witkowsky: I really don’t see that much risk in terms of let’s say like increased scrutiny of the private equity market or something like that. The big catastrophe in the private equity world a few years ago was this increased SEC scrutiny that came about as sort of one of the results of the great financial crisis. One of the fixes was that the SEC was going to pay a lot more attention to the private equity. Private equity firms would be forced to register as advisers and fall under a SEC exam regime as they call it. SEC is able to come in periodically and look through all the books and all the contracts and scrutinize everything. This is something that private equity never had to deal with before. And so this was looked on as potentially a catastrophe for the industry, that this would affect the industry’s ability to compete because being private and not being transparent and not having any of the details of your investments, or how your funds work out there gave private equity firms advantage.
Well, this happened, SEC came in, a lot of firms were punished in varying degrees of integrity. All sort of fines in order to wipe away the examinations or the investigations and that’s it. The industry adapted. Limited partners were very happy that some bad practices that were going on were brought to light and stopped and that was kind of it. And so to me, like that was the real risk when that came about, because that had real, practical, everyday, real life implications. Here is a regulator digging into your books. I don’t really see it going much beyond that. I mean, we’re not talking about the public market.
Chris Riback: Private equity, they don’t have to worry about Bernie Sanders?
Chris Witkowsky: I don’t think so. I really don’t. To me, it would work on a much broader level than private equity. If somebody like Bernie Sanders who’s going to come in and start to try to regulate the capital markets, or I don’t know, impose this sort of billionaire’s tax, that’s where I think individual private equity managers will get hit for sure. But I just don’t see what they could do to the industry to really increase regulation beyond what’s already happened. There are certain smaller details where, for instance, this is sort of the performance fee that a GP collects on profit, they could change that tax treatment and that would cost a little bit more money. But again, and the private equity manager would eventually put that cost on to his investors. And so it’s hard for me to see how PE would really be impacted by that. I could see how the broader capital market, how the broader economy could be impacted by somebody like a Bernie Sanders. But I don’t see anybody really targeting PE right now.
Chris Riback: Let me follow up then on the public equity market, private capital that you kind of touched on a little bit earlier. I don’t know if you happen to see Bain’s 2019 Global Private Equity Report. A lot of important and interesting material there, including this line. “We see fundamental shifts happening in capital markets that are likely to drive a long term trend toward much larger private capital and private equity opportunities versus traditional public equity models. This ongoing movement will have seismic impacts for providers of capital, investors of that capital, and for the companies owned by widening variety of private models. They conclude it portends a future in which a much larger share of capital flows into private markets.” What’s your take on that?
Chris Witkowsky: I think that part of what they’re talking about there has to do with what we were talking about earlier, is the amount of capital being raised into the private markets. There is so much capital being raised by private markets, not just private equity, but also real assets, also real estates, all kinds of different private strategies. And it continues to take a bigger slice of the market. And at the same time, you’ve seen sort of the IPO market lose its luster over the past few years. And you kind of hear about companies wanting to stay private longer, avoiding going public, because of the scrutiny that comes with comes with the public filing.
And so I think that’s what they’re talking about in that line is just that you we’ve been seeing this trend for the past few years and it just … There doesn’t seem to be any sense that it’s going to slow down. Institutional investors like public pensions, endowments, insurance companies, other types of institutions are just pouring money into the private markets and there just doesn’t seem to be any hint that that’s going to slow down anytime soon.
Chris Riback: You wrote about this just about a month, maybe a little bit more ago, secondaries and their incredible continued growth over the last year. Given what you’re saying right now, you’re still seeing secondaries as a strong growth opportunity?
Chris Witkowsky: Oh, absolutely. That is … I mentioned at the intersection of politics and private equity is one of my favorite topics. Secondaries is also one of my other favorites.
Chris Riback: You’re a fascinating guy. I mean you get invited to … You’re a hit at all the parties?
Chris Witkowsky: No, not at all. Nobody seems to want to talk about this stuff. So it’s interesting that you have an illiquid asset class, like private equity where the expectation is that you’re going to hold an asset for 6, 10, 15 years. Well there is a way to make it more liquid, and that’s the secondary market. And this side of the market has grown over say the past … You could say maybe the past 20 years to where it hit the estimated transaction total last year was somewhere around 70 billion or more. This is when I started covering private equity. In 2008, I think it sat around 6 billion or something like that.
Chris Riback: Incredible.
Chris Witkowsky: It’s incredible how this side of the market has grown. And it’s going to continue to grow because as we see more money flowing into the, as they say, primary side funds being raised, there’s going to be this need for some of those investors in the funds to get liquidity, whether that’s because they’re in some crisis situation, or because they’re just sort of managing their portfolio, and they’ve decided that they found five private equity managers that they no longer want to do business with, and so they’ve decided to get them out of the portfolio. Whatever the reason, this idea of portfolio management has become almost routine on the part of institutional investors like public pensions.
And so I think that these limited partners, these institutions have a expectation now of liquidity as part of their private equity program. And so the secondary market, again, as I was saying, money’s flowing into it, flowing into those strategies, transaction volume way up, and just, there’s no sense that any of it’s going to slow down. Now, the secondary market, big question with the secondary market is if the economy dips or if we go into a downturn, what happens with the secondary market? That is a big question that’s out there. Because secondary sort of died after 2008.
There were a couple of years where secondaries really all sort of disappeared. And you would think, “Well, why would that be?” Because if you have a lot of distressed investors that want to, like let’s say a California pension that needs liquidity, why wouldn’t they all be selling on the secondary market? And it just didn’t happen after the great financial crisis. So the big question out there will be what happens if we go into a downturn? What happens with that market that’s been humming along for the past five, seven years? And that question is out there. But secondaries is an amazing part of this market growth.
Chris Riback: Let me switch gears to something else that you wrote about: You recently ran your fourth annual Women in PE issue. You profiled 10 women who are thriving in private equity. More broadly … Which is excellent. And the stories were excellent. More broadly, how would you say the sector is doing in terms of women leadership, influence, and opportunities?
Chris Witkowsky: It’s not doing that great. Similar to the broader financial world, it’s not doing that great, but it’s making progress slowly. And so you can see you the numbers in that article. I don’t have them right in front of me, but I mean there is a definite lack of women at, first of all, leadership positions at private equity firms. And then just a general absence of women in private equity. But again, the numbers continue to climb. There are young women who are getting their MBA’s and who want to go into private equity. So it’s not like the talent pool isn’t there, it’s just that the recruiting processes have not yet, I don’t know what the word is, evolved to where they should be I guess.
And so you do have some standout firms, especially the bigger firms like your Carlyles, the KKRs, and Blackstones and PPGs that are definitely a bit better at that and have programs in place, not only for recruitment, but also for … An important aspect of this story is not just recruiting women into the industry but also retaining them. And especially at that crucial time in a woman’s career where she sort of has to make a decision between having a family or continuing her career. And that is a big stumbling point I think for a lot of women trying to move into the leadership ranks.
And so there are some great examples of firms that have maternity and paternity leave policies that can really help women have families and also continue on their career path. But really, I mean, I’ve talked to … Over the past few years, I talked to a lot of women who are at that point in their career where they’re deciding to have children and their firms, first of all, have maybe never even had a woman on staff, or maybe only one or two, and have no parental leave policy at all. And so they’re having to negotiate and basically create their own policy and bring that to their boss and say, “Well, this is how other people do it. This is how we should do it.”
And so there’s still a long way to go. And what we tried to do in that issue, we have that issue every year in March, is include a story, a general overview about how things are going, a general status about women in PE, and then also do these sort of mini profiles of kind of like superstar women who get recommended to us from our sources say, “Yeah, you definitely should talk to her.” And just point out that here are women doing the job, succeeding, thriving, and here they are and here’s who they are. We just think that’s important to just have that out there.
Chris Riback: Well, a lot of what you’re describing, I have heard as well. I had a conversation a few months ago with Janet Cowell, CEO of Girls Who Invest. I don’t know if you’ve ever had the opportunity to talk with her. And just what you describe, creating the pipeline, creating the internal systems, creating the policies and the mentorships, and creating women in the leadership positions so that the policies have a better chance of changing. A lot of what you’re describing is exactly what other groups are seeking. And to be fair, number of the firms are … I think it’s in everyone’s consciousness, but I think also it’s everyone would agree it’s time for results as well. Does that jibe with what you’re hearing?
Chris Witkowsky: Yes, and mentorships is a word we hear over and over again when we report on this. And that is just such an important aspect of this because men have it. It’s built in from years and years and years into college buddies and professors and things like that. And women don’t have it. And so they, they often are having to reach out to men as mentors. And many of them I talked to have successfully done that. But really, a lot of these groups that have been forming over the past few years are definitely really pushing that networking aspect.
Chris Riback: Janet Cowell was very, very … She not only used to be in the industry, but is former treasurer of the state of North Carolina, and they’re pretty active. It’s an interesting group. Just to close out and probably the hardest topic for you to talk about, you. Tell me about your background. How did you get into covering private equity? Were you always a business reporter? Tell me about you.
Chris Witkowsky: No. I started out in my professional career in community newspapers outside of Philly and was writing about … I was a police reporter for two years and covered municipalities and things like that, and loved it, and knew that journalism was going to be my career. And then my now wife, who was my girlfriend at the time, said, “We should move to New York.” “Eh, why not? Okay.” So we were both looking for jobs for awhile and I stumbled on a job that was writing about the boards of directors of Fortune 500 companies. It was a trade .. A weekly trade magazine, just for them. So it was an audience of about like 75 old guys and they paid like 20 grand per issue, or something like that.
And so that’s where I started, and moved around for a little while, and then ended up in, oh, I guess it was 2008, working, doing a short stint with Lenny Dykstra, the formal baseball player.
Chris Riback: Former Mets, Phillies, who ran into a little bit of trouble.
Chris Witkowsky: At that time he was trying to start his media empire. He had come up with this idea to start a magazine that would be in every athlete’s locker. And the whole point of it would be what to do with your money after you retire, how to make sure that you aren’t broke once you can’t play anymore. So a good idea.
Chris Riback: It is a good idea.
Chris Witkowsky: The magazine … yes. But it just didn’t work. And for various reasons, which I won’t go into here. But I was only there for a few months, and that sort of imploded. And then found myself that summer of 2008 looking for a job. And finally found one at a company called PEI, which covers private equity, and started there the Monday after Lehman collapsed. And so my first exposure to private equity is basically writing about bankruptcies for about a year. Yeah. So that’s how I got into it.
Chris Riback: But they don’t blame the crash on you though, right? That’s just coincidental, the whole 2008 timing?
Chris Witkowsky: I think so. Me and Lenny. I hope not.
Chris Riback: Not that part of Lenny. Maybe if you could hit a ball like Lenny, but not the other parts of his background. And what’s it like to cover the industry? I mean to turn, I mean writing about the 75 wealthy people that you talked about, you are covering an industry with a lot of big personalities, not a little bit of ego, a great deal of humility in the right places when you find it. How do you find covering the industry? What do you like about covering it and what do you maybe not like as much as you wish you did?
Chris Witkowsky: What I don’t like is a lot of times having to sort of officially deal with the firms because you’re only going to hear the press release, and it’s just not helpful and it doesn’t make for a good story. I mean, ultimately I’m a story teller and I want a great story. And so it may sound weird, but I don’t love directly dealing with the firms. The way I’ve done it for these many years now is that I talk to the limited partners and I have a lot of sources in that community, whether public pension officials, endowment folks, people in insurance companies, people … I sort of view these people on the LP side as like your regular people, almost like the blue collar workers of the industry.
And these are basically just 9-to-5 people with a salary and sort of strangely enough dealing with the billions of dollar funds that they have to decide whether they want to commit money too. And so I have just had a lot of success and a lot of fun covering the industry from that perspective. And I think it’s the best way to do it, because otherwise, you’re just sort of getting spin and fluff and there’s really not a story. And so that’s what I love about it, and sort of that LP world. That’s how I’ve always done it. And I think that it makes for the best stories.
Chris Riback: That’s fascinating. And that explains a lot because you are must read material, so interesting to hear part of what drives it. Chris, thank you.
Chris Witkowsky: Absolutely, Chris. I really appreciate it.