Top PE Execs Offer Grim Economic Forecast

HONG KONG (Reuters) – Top executives at some of the world’s largest private equity firms gave a grim forecast on Thursday for the U.S. and global economies, although they expected Asia to recover from the downturn more quickly.

Carlyle Group co-founder David Rubenstein said he expected a recession in the United States to last longer than the historical average of around 9 months.

“The recession this time will be far deeper than what we’ve seen for quite some time,” he said.

“Unemployment is up, retail sales are down. I suspect the recession will last at least a year, and I suspect quarter over quarter to have negative growth of 2 to 4 percent,” he said.

The U.S. unemployment rate was likely to go up to 10 percent, from a 14-year high of 6.5 percent in October, Rubenstein added.

Adding to the difficult economic period was a U.S. government administration in transition, he said, with President-elect Barack Obama not taking office until Jan. 20.

Bain Capital Managing Director Paul Edgerley expected U.S. home prices to drop another 15-20 percent and predicted “a very deep recession, I think the worst we’ve seen in my lifetime”.

He pointed out that 70 percent of the gross domestic product in the United States is consumer spending.

“The consumer is beaten up and they have a long way to go,” Edgerley said at the Asian Venture Capital Journal private equity conference in Hong Kong. “It’s going to take a long time for the U.S. economy to turn around and become a growth engine.”

He added that the U.S. was not alone, with the UK, Spain and Ireland “probably in a bigger mess than the U.S. is in now”.

A deeper drop in U.S. home prices would likely add further challenges to Bain’s investment in Home Depot Supply, which is tied closely to the home building sector.

David Bonderman, one of the the most influential figures in the U.S. private equity industry, said a global recession would be deep and prolonged, and also believed the U.S. housing market would fall further.

Both executives agreed that Asia, while getting hit by the financial crisis, was well suited to withstand it, thanks in part to banks’ relative lack of exposure to risky subprime mortgage securities which sparked the global financial crisis.

Price to equity ratios are cheap in Asia, as Asian equities tend to fall harder in a recession, Bonderman said. He also noted that consumer spending was still rising across Asia, although confidence is being dampened by falling stock markets and concerns over the impact of the global fianncial crisis.

Edgerley was more optimistic, saying the region was in a better position to weather the financial storm, based on the growth of its consumer market and burgeoning middle class. Bain’s Asia focus is on China, Japan and India.

“I think it’s likely that China will grow at 7 to 8 percent for most of 2009 and 2010,” he said.

He was less encouraging about India’s prospects, as the country’s economy is not as driven by exports as China’s. He expected India’s economy to grow 5 percent to 7 percent over the next year as outside capital investment into the country slowed.

TPG has hit a rough patch lately, with several investments getting hit by the credit crunch.

The move by the U.S. government in September to close and sell the banking assets of savings and loan company Washington Mutual Inc WM.N to JP Morgan (JPM.N: Quote, Profile, Research, Stock Buzz) wiped out a $1.35 billion investment from Texas-based private equity firm TPG, made five months earlier.

It was the largest U.S. bank failure ever, and a blow to TPG’s wallet as well as its reputation as one of the savviest buyout investors across the globe.

Bonderman said culprits in the credit crisis included the accounting profession and mark-to-market accounting rules.

“With mark to market, you see artificially low prices, unlike mark to model,” the formula used by insurers, he said. “When you force people to take a mark down, you cause a death spiral.”

TPG’s investments in BankThai BT.BK in Bangkok, Taiwan’s Taishin Financial Holdings (2887.TW: Quote, Profile, Research, Stock Buzz) and Japanese consumer finance company NIS Group 8751.T are all under pressure.

TPG Capital, formerly Texas Pacific Group, is one of the largest private equity firms in the world, with more than $50 billion under management. Boston-based Bain Capital is also among the largest private equity firms globally, and is currently investing a roughly $10 billion buyout fund.

Edgerley, who joined Bain in 1988, has been behind investments in such companies as chemicals company Brenntag, Sensata Technologies, a carve-out from Texas Instruments Inc.; and MEI Conlux, a carve-out from Mars Inc.

By Michael Flaherty
(Editing by Kim Coghill)