WEBVTT - Effects of Macro Forces on Private Market Valuations

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<v Speaker 1>You're listening to Bloomberg Business Week with Carol Messer and

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<v Speaker 1>Tim Stenovic on Bloomberg Radio. Well, we spent a ton

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<v Speaker 1>of time talking about the public markets, how they fared in,

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<v Speaker 1>how they're faring in. I mean that's what we do

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<v Speaker 1>here at Bloomberg, we talk markets. But what about private markets?

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<v Speaker 1>We do spend a good time talking about them, but

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<v Speaker 1>we really want to get into it with Scott Sperling,

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<v Speaker 1>the co CEO at Thomas h Lee Partners. He's a

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<v Speaker 1>great voice when it comes to everything that's happening when

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<v Speaker 1>it comes to privates alternatives. He's been a decade with

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<v Speaker 1>the Harvard Management Company overseeing alternative assets for Harvard's endowment.

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<v Speaker 1>He's joining us now with an outlook on private equity.

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<v Speaker 1>It's good to have you with us, Scott. How are you?

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<v Speaker 1>Thank you? Good, good, beautiful day in Boston. What more

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<v Speaker 1>can we ask for? I mean, I guess what more

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<v Speaker 1>we could ask for is I don't know, you know,

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<v Speaker 1>a decade of near zero rates. But that's neither here

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<v Speaker 1>nor there. I think that that that prayer was already answered. Okay,

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<v Speaker 1>we got that. The question is now what? So now

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<v Speaker 1>what in and beyond? As the fed looks at a

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<v Speaker 1>guest traders look at a terminal rate of five percent,

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<v Speaker 1>which you know, when you look historically, is not all

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<v Speaker 1>that high. That's what everybody keeps saying, Scott, it is.

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<v Speaker 1>It is if you're under forty the truth. That's the truth.

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<v Speaker 1>And I don't mean that in a funny way. I

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<v Speaker 1>just I truly mean that. What you know, look at

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<v Speaker 1>the percentage of people you have on Wall Street now

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<v Speaker 1>who have never lived in an interest rate environment. You

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<v Speaker 1>know that we saw in like the seventies, eighties or nineties,

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<v Speaker 1>an amazing percentage actually didn't live through the great financial

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<v Speaker 1>reception in two thousand and eight now, fortunately or unfortunately.

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<v Speaker 1>I still remember the first mortgage that my wife and

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<v Speaker 1>I got back in night. Can I guess it was

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<v Speaker 1>seventeen and a half. I was going to say, fifth team,

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<v Speaker 1>I mean, this is That's the thing. So okay, So

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<v Speaker 1>does that mean we have a repeat of the nineteen eighties? Yeah,

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<v Speaker 1>so I don't think so. I think that that the

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<v Speaker 1>world has evolved the nature of the business models that

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<v Speaker 1>are prevalent. Uh in the preponderance of the value in

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<v Speaker 1>the in the public markets and also in the private

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<v Speaker 1>markets is much better than the nature of the business

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<v Speaker 1>models that existed back in the eighties. I think the

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<v Speaker 1>ability um to better control inflation does exist relative to

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<v Speaker 1>where we were in the late seventies and early eighties,

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<v Speaker 1>given the enormity of the pop and energy prices. But

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<v Speaker 1>what we are losing is the benefit of twenty to

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<v Speaker 1>thirty years of strong anti inflationary forces, such as technologies

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<v Speaker 1>that allowed us to produce much more energy at much

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<v Speaker 1>lower pricing UH technology, GEAS, and the ability to move

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<v Speaker 1>manufacturing globally to places that could do it much less expensively.

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<v Speaker 1>And we are in a period where the cost of

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<v Speaker 1>regulation is going up. Those three very anti inflationary forces

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<v Speaker 1>that predominated for most of the last two to three

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<v Speaker 1>decades allowed the FED and then more recently fiscal authorities

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<v Speaker 1>to pump enormous amounts of liquidity into the system without

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<v Speaker 1>causing inflation, and that resulted in that zero interest rate

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<v Speaker 1>environment that we referred to that we've we've already had

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<v Speaker 1>the benefit of as we look forward, because those anti

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<v Speaker 1>inflationary forces have been reversed or at least a run

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<v Speaker 1>out of steam, and we are looking at a series

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<v Speaker 1>of things that will be a challenge from an inflationary

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<v Speaker 1>perspective in terms of putting it back in a tube

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<v Speaker 1>most um uh, I guess most forcefully, let's look at

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<v Speaker 1>at wage price inflation and um the need for people

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<v Speaker 1>to get ever higher wages to deal with the ever

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<v Speaker 1>higher cost of living UM. The FED is going to

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<v Speaker 1>be very focused on trying to do whatever it takes

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<v Speaker 1>to not put us back into a situation that we

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<v Speaker 1>experienced in the eighties, and I think there's a high

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<v Speaker 1>probability they will succeed. The bigger question is what's the

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<v Speaker 1>new normal when we get there. Is it four or

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<v Speaker 1>five percent interest rates or three and a half percent

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<v Speaker 1>interest rates? Can they get to two percent inflation or

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<v Speaker 1>will we be back in a world of about three

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<v Speaker 1>to four percent inflation? That would have been nirvana as

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<v Speaker 1>we thought about it for most of the nineties, seventies, eighties,

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<v Speaker 1>and even into the nineties, but seems very high today.

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<v Speaker 1>And the implication for that is what we've been talking about,

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<v Speaker 1>which is it has a very significant impact on the

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<v Speaker 1>way that we price the value of companies in the

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<v Speaker 1>public markets and also in the private markets for those

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<v Speaker 1>of us in private equity. Well, Scott, let's bring it

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<v Speaker 1>back to to your point the private markets. I'm curious

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<v Speaker 1>what the bowl cases for private markets at a time

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<v Speaker 1>when I think it's widely understood that private lags the

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<v Speaker 1>public markets. And if there's still a lot of pain

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<v Speaker 1>in store for the public markets, then by definition does

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<v Speaker 1>not mean there's still going to be a lot of

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<v Speaker 1>pain in the private market. So what is the incentive, uh,

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<v Speaker 1>to to pursue that. Well, I think that there are

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<v Speaker 1>two sets of opportunities. And you know, interestingly, if you

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<v Speaker 1>look at the data over the course of the last

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<v Speaker 1>thirty years, it has been periods of economic turmoil where

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<v Speaker 1>you have the most attractive investing opportunities for private equity

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<v Speaker 1>because of the nature of of the patients that we

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<v Speaker 1>can have as an investor, and because of the ability,

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<v Speaker 1>um at least for firms like ours who can help

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<v Speaker 1>companies better navigate difficult financial situations. Uh, when we see

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<v Speaker 1>this kind of disruption and valuation, that tends to be

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<v Speaker 1>an attractive time to invest. You're exactly correct, though about

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<v Speaker 1>the lag time. So the public markets have corrected. Uh.

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<v Speaker 1>Maybe a lot of things aren't cheap, but there's certainly

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<v Speaker 1>a lot lower price than they were six, twelve, eighteen

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<v Speaker 1>months ago, and there are a lot of companies that,

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<v Speaker 1>again have very good business models. Think about some of

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<v Speaker 1>the technology companies, particularly things that have high recovering revenues,

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<v Speaker 1>good models to invest in. Well, let's talk about what's

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<v Speaker 1>the right what's the right multiple level Well, let's talk

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<v Speaker 1>about some of these companies. Definitely interested in hearing about

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<v Speaker 1>your thoughts about some of your portfolio companies. UM, let's

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<v Speaker 1>just go with auction dot Com, for example, the company

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<v Speaker 1>sells foreclosed homes. I would love to hear what you're

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<v Speaker 1>seeing when it comes to the pipeline for or closures

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<v Speaker 1>and and bids for these properties because it it can

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<v Speaker 1>kind of tell us about the broader economy. Sure so UM.

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<v Speaker 1>To be clear, auction dot com itself is not involved

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<v Speaker 1>in the foreclosure process or UH chain of ownership of

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<v Speaker 1>foreclosed properties. So it's a technology platform that is a

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<v Speaker 1>automated marketplace that allows the folks who own that mortgage

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<v Speaker 1>paper or the actual foreclosed property too much more efficiently

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<v Speaker 1>and hopefully with many fewer fewer errors, go through the

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<v Speaker 1>process it's necessary of foreclosure and then be able to

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<v Speaker 1>put that property back into the market UH at the

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<v Speaker 1>lowest possible cost, most efficiently. So Auction dot Com. UM

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<v Speaker 1>is a technology company that serves UM the folks who

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<v Speaker 1>are involved in UM the mortgage market more broadly, but

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<v Speaker 1>specifically UM to help ensure that the for closure process

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<v Speaker 1>is as UM accurate as possible, and that the folks

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<v Speaker 1>like Fannie and Freddie who often own that paper and

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<v Speaker 1>take those properties, can then UM put it that property

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<v Speaker 1>back into the market as efficiently. So what are you

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<v Speaker 1>guys seeing in that business right now? Possible? You know,

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<v Speaker 1>I would say that there's certainly a turn up in

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<v Speaker 1>the number of foreclosures, but you know we're nowhere near UM. Uh.

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<v Speaker 1>What happened during the Great Financial Recession. Obviously, as we

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<v Speaker 1>anticipate a more difficult macro economic environment, UM that that

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<v Speaker 1>that may change a bit the higher volume of closures. Hey, Scott,

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<v Speaker 1>we gotta run thirty seconds left? Just a comment on

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<v Speaker 1>high tower advisors wealth management given market plunge, how's that

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<v Speaker 1>in a business? Thirty seconds? So? Uh, These r I

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<v Speaker 1>A H advisory businesses are a good, strong businesses. UM.

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<v Speaker 1>We've seen continued significant growth, very strong secular forces driving

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<v Speaker 1>towards the r I A from the wire house UM

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<v Speaker 1>and UM. What we've tried to do is build the

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<v Speaker 1>industry leading platform again using technology and the ability to

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<v Speaker 1>scale services to the individual advisors. Scott Sprewing, We love

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<v Speaker 1>talking to you. You've got to come back and join

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<v Speaker 1>us against soon. He's coach CEO of Thomas h Lee Partners.

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<v Speaker 1>He spent years at Harvard Management overseeing privates for Harvard's

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<v Speaker 1>endowment private equity. Really good to have you with us,

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<v Speaker 1>Scott Sprewing. This is Bloomberg