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 Stenevic 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 but beautiful day in Boston. What

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

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<v Speaker 1>more 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 ine 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>and an amazing percentage actually didn't live through the Great

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<v Speaker 1>financial recession 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 was seventeen

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<v Speaker 1>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, GE's and H, the ability to

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<v Speaker 1>move manufacturing globally to places that could do it much

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<v Speaker 1>less expensively, and we are in a period where the

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<v Speaker 1>cost of regulation is going up. Those three very anti

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<v Speaker 1>inflationary forces that predominated for most of the last two

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<v Speaker 1>to three decades allowed the FED and then more recently

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<v Speaker 1>fiscal authorities to pump enormous amounts of liquidity into the

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<v Speaker 1>system without causing inflation, and that resulted in that zero

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<v Speaker 1>interest rate environment that we refer to that we've we've

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<v Speaker 1>already had the benefit of as we look forward, because

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<v Speaker 1>those anti inflationary forces have been reversed or at least

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

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

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<v Speaker 1>an inflationary perspective in terms of putting it back in

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<v Speaker 1>a tube most um uh, I guess most forcefully, let's

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

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

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<v Speaker 1>the ever higher cost of living. Um. The FED is

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

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<v Speaker 1>it takes to not put us back into a situation

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

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<v Speaker 1>a high probability they will succeed. The bigger question is

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<v Speaker 1>what's the new normal when we get there. Is it

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

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

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<v Speaker 1>inflation or will we be back in a world of

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<v Speaker 1>about three to four percent inflation? That would have been

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<v Speaker 1>nirvana as we thought about it for most of the

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<v Speaker 1>nine seventies, eighties and even into the nineties, but seems

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<v Speaker 1>very high today. And the implication for that is what

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<v Speaker 1>we've been talking about, which is it has a very

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<v Speaker 1>significant impact on the way that we price the value

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<v Speaker 1>of companies in the public markets and also in the

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<v Speaker 1>private markets for those of us in private equity. Well, Scott,

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<v Speaker 1>let's bring it back to to your point the private markets.

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<v Speaker 1>I'm curious what the bowl cases for private markets at

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<v Speaker 1>a time when I think it's widely understood that private

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

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<v Speaker 1>of pain in store for the public markets, then by

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<v Speaker 1>definition doesn't mean there still want to be a lot

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<v Speaker 1>of 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 can kind

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

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

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

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

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<v Speaker 1>you guys seeing in that business right now? 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 were nowhere

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<v Speaker 1>near UM. Uh. What happened during the Great Financial Recession. Obviously,

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

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<v Speaker 1>that that that may change a bit the higher volume

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<v Speaker 1>of core closures. Hey, Scott, we gotta run thirty seconds left?

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<v Speaker 1>Just a comment on high tower advisors wealth management given

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<v Speaker 1>market plunge, how's that in a business? Thirty seconds? So, Uh,

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<v Speaker 1>These R I A H advisory businesses are 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 Spilling, 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 again 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 Spilling. This is Bloomberg