13 ms·
Private equity may be heading for a fall
- teekert 4y agoSo, what does this mean for my mortgage?
- bombcar 4y agoShouldn't mean anything as long as you can keep paying on it.
- Finnucane 4y agoIf it's fixed rate. Anyone who took an adjustable loan at a time when rates only had one way to go (up) is gonna be boned.
- saiya-jin 4y agoand that's the trick, once fixations end those easy-to-pay 2k will become 4k (or 7k)
- thedougd 4y agoARMs sold today are typically it the 5/1,7/1,10/1 variety. The terms outline the maximum increase per year and lifetime after the fix ends. A doubling or tripling of payment immediately at the end of the fix term would be unusual.
- HWR_14 4y agoMake sure you don't have an ARM. ARM holders might see their payments skyrocket when it goes off the fixed rate. If you currently have a fixed rate mortgage then you are locked in and in great shape. Nothing will change monthly in your mortgage. The "what does this mean" could be that you can comfortably afford to live there but that moving would become much more expensive that you are stuck in your current home for five years.
- leoh 4y agoIn some cases, one can “port” their mortgage; ie sell their existing place and keep paying down the mortgage and buy a new place
- HWR_14 4y agoI don't know what that would mean. You sell your house as a owner-financed thing? It still doesn't get you the cash up front to put down on a new house.
- leoh 4y agoLet’s say your house is worth $2M and you bought it for $1M and had a loan for $600k. You sell the house and have $2M to spend on a new house and a loan to continue paying off.
- N-Krause 4y agohttps://archive.ph/X7W0p https://archive.ph/X7W0p
- recursivedoubts 4y ago> if investors in equities and debt markets will remember anything of the first half of 2022 it will be generational sell-offs. A generation is 30 years. The stock market is roughly 20% off its highs. It went down 25% at the start of covid, just two years ago. In 2008 it went down 57% In 2000 it went down 42%
- nightski 4y agoWe'll see, but those events were dramatically different. I don't think anyone can easily predict what is going to happen right now by looking at those two events.
- recursivedoubts 4y agosadly, I don't have a crystal ball my point is only that there is a lack of perspective on how bad things currently are
- supernovae 4y agoYou know, from having lived through the 80s and several crashes in between I'd say what sucks today isn't the financial/jobs markets or economy but rather the people and how terrible we've become politically divisive. That's what I see. That 20% market drop from high just seems to be a correction and it was needed because that market high was based on crazy stuff anyway. But that 20% didn't do jack to 99% of the country. We didn't win when it went up, but inversely, we haven't really lost on its way down. Sure, inflation sucks but if you ask me - stalling our insatiable appetite to consume is probably a good thing.
- danaris 4y agoIME, "generation" as a unit of time is usually used to mean 20 years, not 30.
- recursivedoubts 4y agotypically a generation is 20-30 years: https://en.wikipedia.org/wiki/Generation https://en.wikipedia.org/wiki/Generation even by the 20 year definition, all of the events listed fall within that window: the .com crash bottomed in 2002/2003
- newaccount2021 4y ago
- cs702 4y agoThe private equity industry -- excluding VC, which represents a small fraction of total capital raised -- relies extensively on debt (LBOs, debt-financed infrastructure deals, debt-financed real estate deals, etc.), i.e., borrowing to juice returns. It's not a coincidence that the industry was born in the 1980's, when interest rates in the US began declining, after the Fed had increased them to combat high inflation in the 1970's. Ever since, for four decades now, interest rates have only declined and declined, in fits and starts, making life easier and easier for borrowers of all kinds: https://fred.stlouisfed.org/graph/?g=RveY https://fred.stlouisfed.org/graph/?g=RveY Many private equity deals that arguably were economically viable when the 10-year treasury's annual yield was ~0.6%, less than a year ago, may not be viable now that the 10-year treasury's annual yield is ~3%, and are likely to suffer financial distress if interest rates rise further -- say, 10-year treasury yields of ~5%, ~6%, or more. If that sounds high, keep in mind that the last time the Fed had to deal with high inflation, in the 1970's, the 10-year treasury yield rose to a peak of ~16%! Over the same past four decades, valuation multiples have only risen and risen, in fits and starts, making life easier and easier for those who make money by buying businesses, holding them for a while, and selling them down the road. For example, here's the ratio of US stock market capitalization to the size of the US economy (GDP): https://fred.stlouisfed.org/series/DDDM01USA156NWDB https://fred.stlouisfed.org/series/DDDM01USA156NWDB The rise in valuation multiples over the past four decades makes sense, given that the net present value of any business is inversely proportional to the discount rate used to value its future profits, and discount rates are equal to prevailing long-term treasury rates plus a premium. If interest rates continue to rise, valuation multiples are bound to decline too. -- EDITS: Changed language in response to comments below so it better reflects what I meant to write in the first place.
- snake_doc 4y ago> The private equity industry -- excluding VC, which represents a tiny share of total capital raised -- relies extensively on leveraged buyouts (LBOs), i.e., borrowing to juice returns. In 2021, buyout was ~30% PE funds raised, VC was ~10%, growth was ~10%. “Tiny” is not true anymore. https://www.bain.com/insights/private-equity-market-in-2021-global-private-equity-report-2022/ https://www.bain.com/insights/private-equity-market-in-2021-...
- NelsonMinar 4y agoThe one reliable thing about private equity is the very high fees.
- youngtaff 4y agoAnd how little tax they pay
- Bubble_Pop_22 4y agoOn the other hand inflationary environments are great for infrastructure and Real Estate investments. If one type of private equity might be headed for a fall (nobody has the crystal ball) PERE (Private Equity Real Estate) and PEInfra (Private Equity Infrastructure) might benefit from it.
- bshipp 4y agoReal Estate benefits from cheap money, which dries up in an inflationary environment as central bank juice rates. We're already seeing sizable jumps forecasted for the remainder of 2022 and beyond as this inflationary spiral finally takes off.
- mancerayder 4y agoWhy would you manage real estate with a shitty cap rate, when you can buy bonds that have less overhead, risk and more liquidity? Real estate funds are a great idea when rents are going up, but it isn't so clear that will keep happening. Or appreciation is expected. That's definitely not happening anymore.
- Bubble_Pop_22 4y agoPension funds, insurance companies and SWFs don't reason like individuals, they have to put their money to work and for them the vast majority is govt. bonds anyway, even in the past 10 years. By the same token they have to decide what to do with the 15-20% which isn't bonds. Just as a matter of portfolio construction you don't want to be in equities, don't want to be in Venture. Only Real Estate and Infrastructure are left
- deleted 4y ago[deleted]
- fdgsdfogijq 4y agoRecently heard this description of PE: Private Equity is an arbitrage on bloated companies. Typical cycle is innovative startup -> efficient corporation -> beauracratic corporation. PE firms buy the companies late in the cycle and then cut the fat. Commonly also seen in activist investors. This is a needed function that will never go away.
- snarfy 4y agoI've never seen it work that way. Typically they cut a bunch of expensive overhead, like employees, which juices the books to make it look much more profitable, then sell to someone else left holding the bag of a dead shell of a company. Cut long term viability for short term gains.
- amanj41 4y agoDepending on the parent commenter's definition of cutting the fat, I don't see your understanding's of PE as being much different
- pfdietz 4y agoSometimes squeezing the last drops of juice out of a doomed lemon is the economically most efficient thing to do. The purpose of a company is to serve the interests of its shareholders (within the bounds of law), not to survive indefinitely. We all know cases of companies that squandered value in vain attempts to stay alive, when they just could have slowly put themselves out of business and returned the last years of profits to their shareholders. Kodak, I'm looking at you.
- mbesto 4y agoIf by fall you mean from its all time highs, sure, but theres still so much money allocated that needs to be spent: After 10 years of steady growth, dry powder set yet another record in 2021, rising to $3.4 trillion globally, with approximately $1 trillion of that sitting in buyout funds and getting older (see Figures 8 and 9).[0] There was an all time high of 490 buyout funds closed in 2021. What is very likely is that many of these new funds (I see a lot of them...the 8-man shops that came from MDs at places like KKR, Carlyle, Apollo, etc.) will just fizzle out. Like everything else, it's just gettting corrected. [0] https://www.bain.com/globalassets/noindex/2022/bain_report_global-private-equity-report-2022.pdf https://www.bain.com/globalassets/noindex/2022/bain_report_g...
- deleted 4y ago[deleted]
- Havoc 4y agoNot hearing much about this within PE though.
- deleted 4y ago[deleted]
- niceWokr8 4y agoIt’s clear to anyone who looks at a stock chart from 2020-2022 the entire economy was artificially pumped and we’re living through the dump. I don’t really know what else people expect voting for gerontocrats who have made their names on leveraged buyouts, insider trader, gaming the courts after their businesses commit fraud and the like. Neither “side” of the political spectrum is innocent of such things, including the voters. Elder Americans are straight up grifters, free loaders with no ability to accept the rest of the world is not a post-WW2 crater. They were able to win big easy, they are the gold star for nothing generation, due to the rest of the world having been obliterated shortly before their birth. Electing Romneys, Feinsteins, and the rest is lunacy. They have no idea how to do productive work as the world rebuilt itself without them; they all huddled in offices learning how to design models decoupled from reality, convincing themselves of their genius and work ethic as their families expropriated earnings from workers; because of course they’re owed a cut for producing nothing. It just makes perfect sense.
- philovivero 4y agoI'm struggling to find something useful in this comment. I'll just pick one point. > Elder Americans are straight up grifters, free loaders with no ability to accept the rest of the world is not a post-WW2 crater Compare against younger Americans who are straight up grifters, free-loaders making up crypto coins and NFTs and other garbage that wastes precious natural resources for their scammy activities? In case my point isn't clear, you're attributing to some class of people an attitude that equally applies to all other classes of people, but in a way that somehow implies it's special to that one. I guess the one useful tidbit I can get from your comment is... well... it's already a tired cliché, albeit true: neither American political party is the friend of the little people. And although those parties are dominated by Feinsteins and McConnells, there are still Bernie Sanders and Rand Pauls. So... what do we do about that? Other than discriminate against some class of people that's your personal outgroup? Maybe work at a local level to elevate more Sanders and Pauls?
- kaydub 4y agoReally? Rand Paul is who you go with?
- dominojab 4y ago
- Blackstone4 4y agoThere is a structural element to consider since PE has raised huge amounts of dry powder and will continue to do so....which means there is huge demand from committed capital that has to be invested...not sure it will go away any time soon since the dry powder will help support valuations to a certain extent even if they come down with higher interest rates.
- Joel_Mckay 4y agoPeople will always gamble when its other peoples money. And for those who did not find true inflationary shelters to soften the impact, things are going to get worse before they improve. Admittedly, I too was stuck with some laggard energy ETFs for years thanks to being naive enough to listen to a banker once (tax event trap), and even that garbage has bounced back like a dead cat (I have to donate to VOKRA every-time I repeat that colloquialism). We live in strange times... ;-)
- mancerayder 4y ago>People will always gamble when its other peoples money. And for those who did not find true inflationary shelters You mean like real property? Some of us tried very hard to purchase real estate and failed.
- Joel_Mckay 4y agoI am not bullish on dirt backed holdings these days. While it is easy to fall into a FOMO mindset in a manipulated market.. eventually the gamblers left at the table always lose. Annual sales are down 43%, record prices pumped another 5%, but inflation is up 7.5% and growing. i.e. you may yet end up one of the lucky ones if you time things right. ;-)
- nsxwolf 4y agoDoes this mean people will stop ruining restaurant chains and dentists offices?
- sails 4y agoSomewhat interesting perspective on PE in this Bloomberg podcast, which does a reasonable job of explaining why ~23:30 1. PE has had an easy run - rising interest rates and rising value of equity 2. Guest finds shocking - Given 1, PE returns net of fees and adjusted for leverage have become very pedestrian relative to S&P500. If the IPO market slows due to interest rates, then this may trap PE institutional investors. https://omny.fm/shows/odd-lots/jim-chanos-on-why-some-of-the-worst-hit-parts-of-t https://omny.fm/shows/odd-lots/jim-chanos-on-why-some-of-the...
- andrewcamel 4y agoSpeaking as someone who came from PE, agree that higher rate environment means both better investment alternatives and also more expensive capital for LBOs. That said, the firms with fresh capital can make a ton of money buying into this environment. Zendesk being a great first example. Not a huge amount of debt required to do these types of deals. Liquidity going to hide under the figurative rock of fixed income means values get dragged down, which creates an incredible buying opportunity for all these PE funds. Look 5-7 years out, I'd guess 2022 and 2023 vintage funds will be some of the best in history.
- HealthNeed 4y agoForgive my ignorance, what is a vintage fund?
- tomfunk 4y agoThe year the fund started (e.g. a 2022 vintage fund is a fund that started in 2022) https://www.investopedia.com/terms/v/vintage_year.asp https://www.investopedia.com/terms/v/vintage_year.asp
- shostack 4y agoCan you ELI10 this for someone not in the industry?
- uoaei 4y agoThis article is little more than a signal to the PE industry to sink their claws deeper into the regulatory apparatuses of the US government. And they'll do it, because we have a very ineffective regulatory system.