Henry Kravis said back in April that we’re in private equity’s (PE) “golden age”. This week, George Roberts, Kravis’ cousin and a co-founder of buyout giant Kohlberg Kravis Roberts & Co. (KKR), said the coming years would be harder. And David Rubenstein, co-founder of Carlyle (TC Group Llc.), the rival buyout group, said the golden age couldn’t lastforever.
Market sentiment has clearly changed. But why are these buyout kings, along with an increasing array of other financial luminaries, acknowledging the problems? Surely it would be in their interest to deny there was anything wrong—particularly if, like KKR, they are on the point of launching a mega initial public offering (IPO).
Well, proclaiming that the emperor is fully dressed when everybody knows he isn’t, is hardly smart. The sensible, damage-limitation tactic could be to argue that he is wearing boxer shorts. And that’s effectively what the financial great and good have been doing.
In fact, they are already arguably behind the curve. When Kravis spoke of a golden age, investors were already fretting about troubles in the US subprime mortgage market. The doubts increased as the losses became concrete, most notably last week’s total wipeout of one fund managed by Bear Stearns & Co., Inc.
Meanwhile, credit spreads have widened, conditions on new leveraged buyout (LBO) loans are tighter, and banks are finding it hard to shift $40 billion (Rs1.61 trillion) of LBO debt for the likes of Chrysler and Alliance Boots, the UK retailer.
Even the enthusiasm for emerging markets has faded: Rosneft, the Russian oil giant, last week pulled a $2 billion bond offering.
True, equity markets are breaking records. But all is not well even there—especially with IPOs linked to the financial froth of recent years. Last week, both MF Global Ltd and Third Point—a broker and a hedge fund—raised less money than they were looking for. And Blackstone Group’s stock fell further below its issue price last month, putting a dampener on the LBO industry’s most high profile flotation.
While the financial leaders can’t pretend we’re still in the golden age, they are still talking about a silver era. Jamie Dimon, JPMorgan Chase’s boss, spoke last week of a “dramatic” change in investor sentiment. But he argued that a correction would curb unhealthy excesses. And Rubenstein made it clear that he still expected PE to outperform the stock market.
Regulators have also been putting an optimistic spin on the facts. Ben Bernanke, the Federal Reserve Board’s chairman, estimated that subprime losses would be $50-100 billion. But he was quick to add that house prices haven’t fallen, consumer confidence is strong and consumption is holding up. It’s much the same story in Europe. John Tiner, outgoing chief executive of the UK’s Financial Services Authority, summed it up: “I feel the current system is quite robust, but investors will inevitably suffer some losses.”
It’s too early to tell whether this message about a silver age is doing what it is supposed to. The balance is fine. Jittery investors won’t believe their financial betters if they sound unrealistically optimistic. But pessimism, even if it is justified, could create a panic.
What happens next? The financial elite could be proven right: The good times might keep rolling. There could even be a return to the golden times once the subprime losses are absorbed.
But it would probably be fools’ gold. After all, investors now have to contend with real losses. Even the dip in 10-year US government bond yields below 5% is hardly comforting. It’s really a fear rally, as savers flee riskier assets. Inflationary pressures around the world have yet not been mastered. And, in the US, in particular, consumers have to deal with both high debt levels and a much weaker housing market. The next age of finance may not be silver, but bronze, or even mud.