KKR, FFL, TPG execs see challenges in Fed tapering under Janet Yellen

  • Cheyenne’s Bob Grady says markets addicted to debt purchases
  • KKR’s Alexander Navab sees gradual easing next year
  • FFL’s Tully Friedman sees ‘hot potato’ for Janet Yellen

The private equity executives attending the Buyouts West portion of the PartnerConnect 2013 conference at the Ritz Carlton Half Moon Bay Hotel near San Francisco mostly looked past the impasse in Congress over the debt ceiling. Instead, they focused on the sudden spike in interest rates that took place at the beginning of the second half after hints from Fed that it would begin scaling back its debt purchase program.

Markets corrected within a couple of weeks, but the swift and sharp reaction continued to draw attention from the buyout world, just as Janet Yellen, the vice chairman of the Fed, was formally nominated to the position of chair by President Barack Obama. Yellen will take over from current chairman Ben Bernanke when his term ends in January.

Given the importance of interest rates in crafting leveraged buyouts and in the overall health of the U.S economy, the theme of Fed easing surfaced again and again at the conference.

Tully Friedman, chairman and chief executive officer of San Franciso-based private equity firm FFL, said Bernanke was leaving Yellen with a “really hot potato” of paring down purchases. The U.S. economy benefited from the Fed’s efforts to some extent, but longer term, the U.S. is facing major fiscal challenges over tax reform and debt. Friedman said he sees little appetite from Washington leadership to tackle these thorny issues.

Jonathan Coslet, senior partner and chief investment officer of TPG, said the unwinding of the Fed’s roughly $3 trillion “balloon” of asset purchases poses a delicate situation that risks “choppiness of interest rates” along the way.

Bob Grady,chairman of the New Jersey State Investment Council and managing director of Cheyenne Capital, said Yellen faces a “tremendously difficult” job of weaning markets off its addictive program which involved purchasing $85 billion of debt a month. Equally addictive are ultra-low interest rates, which remain close to zero.

“It’s like getting people off Oxycontin,” Grady said in reference to the widely abused prescription painkiller. “This is a hard problem, how do you get off the drug….without compromising economic growth.”

The U.S. continues to be challenged to grow employment, with less federal investment in education and other discretionary spending to help the country compete, Grady said.

Alexander Navab, member and co-head of Americas private equity and co-head of the media and communications team at Kohlberg Kravis Roberts & Co, said the U.S. appears to be in the middle of its recovery cycle, which the Fed plans to maintain.

“The Fed may take foot off pedal but it’s not putting on the brakes,” Navab said. He expects the Fed to begin paring back its debt purchases some time in 2014.

“Rates will remain pretty low for a while,” Navab said. “The big question is how the world will handle the migration from accommodative monetary policy — not just in the U.S. but around the globe. Nobody has a clear roadmap on that.”

KKR is expecting the U.S. economy to continue on a growth path, with strength in the energy and housing sectors, and a rebound in the industrial sector in the works.

“We do see housing, autos, energy manufacturing…as pretty big pillars to drive growth,” he said. “We’re quite bullish on the U.S.” with expectations of growth of about 2.5 percent to 3 percent.