- Blackstone sees opportunity in U.S., overseas distressed real estate
- Sees ‘tough environment’ for PE firms to deploy cash
- Higher interest rates won’t hurt deal-making
James said he expects immigration reform and measures to increase the minimum wage to win Congressional approval in 2014, but is not expecting any other major programs out of Capitol Hill. The executive is expecting mergers and acquisitions to continue at a steady pace with the economic recovery in the wake of the 2008-2009 financial crisis.
”I think the risk aversion [for deals] is fading,” James said at the Predictions 2014 event organized by Reuters Breakingviews, a unit of Thomson Reuters (publisher of Buyouts).
“A lot of what drove the cheap money was economic problems. As those economic problems heal, the cheap money goes away, people get more confident,” he said.
James and the other panelists at the event are not expecting a breakout deal-making year in 2014, however. But they agreed that major corporations may be getting more of a feeling of urgency to do deals as equity prices rise.
”If you’re an acquirer, your stock is up, you can still have a lot of access to fairly cheap money, interest rates are going up but so what, but you’re watching that target stock price go up, so there’s a sense that the train is leaving the station.
”[You think] ’I’m feeling pretty good. I’ll be a little adventuresome.’ So I think it’s thawing,” James said.
Management boards these days are less worried about hostile takeovers than about activist shareholders, who are pushing for value creation, often through merger deals, he said.
Blackstone sees opportunities to own “real assets” such as property and fossil fuel resources, as well as distressed real estate in Europe and Asia. Overall, however. “the U.S. is the place to be,” James said.
Conditions remain challenging for big private equity firms, he said.
“When it comes to buying public companies or selling public companies, we’re more on the sell side now,” he said. ”It’s a good time to exit. You can take big companies public. The market is receiving them well. They’re trading well in the after market.”
Doing deals is tougher, however.
”It’s hard now. Prices in private equity land are high. There’s still too much debt out there and the debt’s cheap. There isn’t much in the way of merchandise for sale. Usually in private equity when there’s an M&A boom, private equity benefits because there’s a lot of ancillary deals that are spun off from that. We’re not seeing that. So there’s a lot of money, high prices, a lot of debt, not a lot of sellers. It’s a tough environment to put money out.”
Event moderator Rob Cox, global editor, Reuters Breakingviews, asked how firms will spend the money raised in 2013, a strong year for fundraising for private equity firms, with more than $400 billion in fresh capital for the asset class.
”The industry hasn’t raised much at all in five [prior] years so it ebbs and flows,” said James. ”We have six years to…deploy the invested capital.”
LPs are still investing in private equity, partly because their allocations in buyout funds have fallen as public equities have rallied in the past year. At the same time, LPs are seeing strong cash inflows from private equity firms exiting assets at a healthy pace.
“They’re having less and less money in private equity and that causes them to put more money out,” James said. “The pendulum swings very fast when you have those compounding effects.”
Private equity still offers 15 to 20 percent returns, outpacing the long-term performance of public equities, he said.
Turning to the banking sector, James said boutique banks may be bought up over the next few years, possibly by Chinese or other overseas banks.