Top executives at some of the world’s largest private equity firms gave a grim forecast on Thursday for the U.S. and global economies, although they expected Asia to recover from the downturn more quickly.
He pointed out that 70 percent of the gross domestic product in the United States is consumer spending.
“The consumer is beaten up and they have a long way to go,” Edgerley said at the Asian Venture Capital Journal private equity conference in Hong Kong.
“It’s going to take a long time for the U.S. economy to turn around and become a growth engine.”
He added that the U.S. was not alone, with the UK, Spain and Ireland, “probably in a bigger mess than the U.S. is in now.”
A deeper drop in U.S. home prices would likely add further challenges to Bain’s investment in Home Depot Supply, which is tied closely to the home building sector.
Both executives agreed that Asia, while getting hit by the financial crisis, was well suited to withstand it, thanks in part to banks’ relative lack of exposure to risky subprime mortgage securities which sparked the global crisis.
Price to equity ratios are cheap in Asia, as Asian equities tend to fall harder in a recession, Bonderman said. But he pointed out that Asian domestic consumption was rising even as exports fall off a cliff, which was cushioning the fall in Asia.
Edgerley was more optimistic about Asia, saying the region was in a better position to weather the financial storm. Bain’s Asia focus is China, Japan and India. His hope for Asia was based on the growth of the consumer market and burgeoning middle class.
“I think it’s likely that China will grow at 7 to 8 percent for most of 2009 and 2010,” he said.
He was less encouraging about India’s prospects, as the country’s economy is not as driven by exports as China’s.
He expected India’s economy to grow 5 percent to 7 percent over the next year, as outside capital investment into the country would slow.
TPG has hit a rough patch lately, with several U.S. investments getting hit by the credit crunch. Its Asian portfolio has also been hit.
The U.S. government’s move in September to close and sell the banking assets of savings and loan company Washington Mutual to JP Morgan wiped out a $1.35 billion investment that Texas-based TPG made five months earlier.
It was the largest U.S. bank failure ever, and a blow to TPG’s wallet as well as its reputation as one of the savviest buyout investors across the globe.
Bonderman said culprits in the credit crisis included the accounting profession and mark-to-market accounting rules.
“With mark to market, you see artificially low prices, unlike mark to model,” the formula used by the insurance industry, he said.
“When you force people to take a mark down, you cause a death spiral.”
TPG’s investments in BankThai in Bangkok, Taiwan’s Taishin Financial Holdings and Japanese consumer finance company NIS Group are all under pressure.
TPG Capital, formerly Texas Pacific Group, is one of the largest private equity firms in the world, with more than $50 billion under management.
Boston-based Bain Capital is also among the largest private equity firms globally, currently investing in a roughly $10 billion buyout fund.
Edgerley, who joined Bain in 1988, has been behind investments in such companies as chemicals company Brenntag, Sensata Technologies, a carve-out from Texas Instruments Inc.; and MEI Conlux, a carve-out from Mars Inc.