Editor’s Letter: When the music’s over

I don’t often find myself in agreement with Donald Trump. However, Trump said something during his first debate with Hillary Clinton (who I also don’t generally agree with), that hit home.

Trump blamed the Federal Reserve for creating a bubble by keeping interest rates low. He claimed the Fed was doing the bidding of the Democrat party by keeping the bubble inflated until after the elections, when the Fed will raise rates, popping the bubble.

Ignoring the political angle, I believe Trump is right in saying the Fed, as it has in the past, has created an environment that forces investors to be as aggressive as possible to hope for any kind of decent return.

This is what we’re seeing in private equity. Panelists, keynoters and attendees chatting on the sidelines of the PartnerConnect West event last month gave voice to this bizarre market that is flush with capital from increasingly desperate investors, driving up asset prices to levels that seem to make everyone uncomfortable.

This is the environment we’re in, for better or worse. And the capital has to be spent. LPs don’t trust it to their favorite managers to hold it and forget about it. They want it invested — they want that money to grow.

Big fundraising

Perhaps the most concerning aspect of today’s market is fundraising. Some estimate private equity fundraising could hit $300 billion this year. This is the case at a time when many LPs, like public pensions, can’t get the kind of returns they need to meet their obligations.

This is also happening after a long period of GPs flooding LPs with distributions that have well outpaced capital calls. The cycle, in a sense, is working perfectly — as GPs return capital, LPs happily recycle it back into private equity, adding a little more each year. New investors come into the market, looking to get a piece of the action. Everyone is fat and happy.

So what’s with the anxiety?

A lot of people seem to feel that at some point, as Andrea Auerbach of Cambridge Associates pointed out, the music will stop. The markets will turn down, and many managers will be left holding companies way overleveraged that perhaps don’t really deserve to be.

Auerbach presented the music metaphor at a speech in New York City in September: GPs have told her as long as the music is playing, they will keep dancing.

The question is, when the music stops, who will be the ones still on the dance floor when everyone else takes a seat?

In this issue, we explore some of those anxieties we heard at the September conference. Check out our lead story for full coverage of the conference and what we heard there. We also delve a bit into politics, exploring those races that, unlike the presidential circus, actually could mean something to private equity.

Happy reading!

Private Equity Editor Chris Witkowsky reflects at home. Photo by Wendy Witkowsky