U.S. public markets have recently undergone a period of considerable volatility. Between mid-September and mid-October, major U.S. equity indices underwent losses ranging between roughly 8% and 10%, while debt markets watched the 10-year treasury yield drop below 2% for the first time since May 2013. It would make sense to conclude that a major decline in public markets can translate into a decline in private market investments; however, a correlation between the two appears to be limited, if not non-existent. We recently spoke with Randy Schwimmer—ACG New York Board member, former Carlyle Group managing director and founder of The Lead Left—to gain more insight into this potential relationship.
There is no lack of capital in the debt markets available to finance private companies, according to Schwimmer, so while major swings in the public markets may sway macro-economic sentiment for a period of time, they will not necessarily deter private-side investments, rather only potentially increase the price of lending. Since the structure of many PE buyouts typically involves a fairly significant debt portion, the presence of this readily available capital ensures that PE shops have access to the resources needed to acquire attractive companies. In addition, Schwimmer points out the inherent difference between debt investors and equity investors, explaining that investors interested in debt markets are seeking appreciation through yield rather than capital gains.
Furthermore, regulated commercial banks have undergone increased scrutiny when lending to companies with high leverage ratios. As a result, Schwimmer notes, there has been increased involvement from non-regulated entities that have established or added lending arms to their businesses to help support private transactions. Examples include Jefferies Finance (Jefferies & Co.), GSO Capital Partners (The Blackstone Group) and KKR Credit Advisors (KKR).
Worries of deflation and significant economic slowdowns in China and Japan have left central bankers scrambling to find effective stimulus policies, while Europe has shown mixed signs of growth and the U.S. has appeared to be faring better than the rest of the world. Coupling these conflicting economic environments with the recent scare in oil prices results in a future public market environment that is extremely difficult to forecast. However, these conflicting measures may ensure that interest rates will stay relatively low to continue underpinning the global economy, much to the liking of buyout shops, which regularly utilize debt financing.
Below you will find data taken from the PitchBook Platform highlighting the total amount of PE deals that closed during recent times of market turmoil, as well as the amount of deals that closed during the equivalent time period immediately following. Sample data was used from three shorter time frames in 2010, 2011 and 2012, while a longer data set was used to represent activity through the 2007-2009 recession.
The data behind these charts is powered by the PitchBook Platform, which you can learn about here.