What are some of the major themes for 2017?
[There] are a number of economic and geopolitical issues in the world. When there’s disruption in a sector or a geography, that usually provides an opportunity. You had an Italian referendum. Whether Italy can restructure their banks now is a question. It’s certainly important to the EU and Italy. There are elections in Germany, France and the Netherlands. Also, there will be a huge debate over the future of the European Union. Clearly there’s a broad populist theme running through the world that the Brexit vote and the U.S. election demonstrated. It’s expected that this theme will continue with the European election activity. It will be very interesting to see how it plays out relative to government policy and trade. Moving into the private equity world, the impact of these events will cause more disruption than normal. So, we will see what kinds of opportunities it provides to general partners.
BlackRock Investment Institute gauges the environment. What’s the latest view there?
With a long, slow expansion, we’ve had modest growth and one of the longest economic recoveries in recent times. The consensus is we’re at an inflection point with economies around the globe. There was more optimism in terms of economic growth than there has been. … In terms of the U.S., clearly we’re now talking about more fiscal stimulus, [about] getting a tax code that makes sense, bringing home capital that has been staying offshore, and putting the healthcare system in a position that provides for all but [also] allows for competition in the private markets.
How do PE trends fit in?
The need for healthcare is increasing; the growing role of technology and its impact on jobs [worldwide]; energy as economies expand; also strong corporate M&A activity. Private equity firms have done very well buying the assets CEOs do not want. In terms of transaction pricing, it’s high and there’s an abundance of leverage. Interest rates may move up but not enough to hurt activity. One of the major macro themes … is the expectation of less regulation. You’ve seen financial stocks move up with the expectation of less regulation already. The majority of these themes we’ve watched for three or four years. With the changes that may come about, these trends could be incrementally accelerated.
Where do you see the fundraising market fitting in?
If the yield on the 10-year Treasury stays someplace in the 2 to 3 percent range in the U.S., and you put your typical equity premium on top of it, you’re looking at 5 to 6 percent equity returns over the next five to 10 years. Pension funds have actuarial rates of 7 to 8 percent and they have not come down. As a result, people will need to seek alpha returns from private markets.
Will returns come down?
Absolutely. They have been coming down. However, John Vogelstein [co-founder of New Providence Asset Management and former president and CIO of Warburg Pincus] — a private equity god — has always said when the public stock market goes up, the spread between public and PE returns narrows and may disappear. But when you have a subdued or falling market, even though PE returns come down, the spread between the PE and public market widens.