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Milken Latest: Private Equity Role in Bank Rescues Sparks Debate
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(Bloomberg) -- It’s the first full day of speakers at the Milken Institute Global Conference in Beverly Hills, California, which brings together everyone from dealmakers to celebrities.
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The gathering, in its 26th year, is focusing on the theme of “Advancing a Thriving World,” looking in particular at challenges across public health, business, industry, society, and culture.
Speakers scheduled for the conference include Carlyle Group Chief Executive Officer Harvey Schwartz, Citadel Securities CEO Peng Zhao, and Glenn Youngkin, governor of Virginia.
Debate Over PE Role in Bank Rescues (7:40 p.m.)
Private equity executives split over whether alternative asset managers should have been permitted by the US government to have a bigger role in solving the regional bank crisis.
“The most important thing, in the context of a bank being in trouble, is to as quickly as possible instill confidence. And I’m not sure today the private equity industry is a good industry to do that for consumers who can flee with their deposits on a daily basis,” Jacob Kotzubei, co-president at Platinum Equity, said during a panel at the conference. “It might be the quickest way to lose money as a private equity investor is to try to stabilize a bank.”
Scott Spielvogel, managing partner at One Rock Capital Partners, said private equity have significant amounts of dry powder that could be put to work.
“If a private equity firm is willing to take on that risk, it’s probably not a bad idea to let them do that,” he said.
McCaul Backs Push for Spending Cap (7:15 p.m. ET)
The GOP-led US House approved “a very responsible package that caps spending at 2022 levels” and can serve as a starting point for negotiations over how to lift the debt ceiling and avoid a potential default, Republican Representative Michael McCaul said.
“I don’t think anyone wants to see us default on our debt. And I think any economist will tell you that’s a bad scenario for the economy,” the House Foreign Affairs Committee chairman told Bloomberg TV at the conference. “But also, we have $32 trillion of debt out there. That is unconscionable and immoral to hand that down to the next generation.”
Waters Says Banking Is Strong, Needs Vigilance (7 p.m. ET)
Maxine Waters, the top Democrat on the House Financial Services Committee, said US banking remains strong after the latest forced sale of a struggling lender, even as executives and regulators must do more to shore up the system.
“What you see is a great attempt for people to work together to purchase the failing banks,” Waters said at the conference. Regulators seized control of San Francisco-based First Republic Bank and sold it to JPMorgan Chase & Co. Monday, the latest in a string of bank collapses that began in March.
Still, reports from the Federal Reserve and the Federal Deposit Insurance Corp. show that more must be done to protect the financial system, Waters said.
“They have to do better in management at the banks,” the California representative said. “We’ve got to do better in supervision.”
Lawmakers Working on Crypto Deal (6:50 p.m. ET)
Democrats and Republicans on the US House Financial Services Committee are working to hash out a deal on stablecoin legislation after disagreements that were on full display at a hearing last month, Maxine Waters said.
The California Democrat said at the conference that she has been working with the panel’s top Republican, Patrick McHenry. A deal seemed close last year, before Republicans unveiled their own version of a prior draft that would expand the role of state regulators in overseeing the asset class. The congresswoman said that’s the easiest piece of crypto regulation for lawmakers to tackle.
“It will be the first effort that we make in terms of cryptocurrency,” she said.
Barclays’s DeClark Sees Markets Opening Up (5:35 p.m. ET)
Barclays Plc’s newly appointed global head of technology, Kristin Roth DeClark, pointed to positive signs in the market for both initial public offerings and mergers and acquisitions.
“We’re seeing a number of markets open up whether it be the leveraged-finance market, which seems to be thawing; the investment-grade market, which is poised for what I think will be a very strong May; and then the equity market,” she told Bloomberg TV at the conference. “We’re seeing IPOs getting done.”
As for slumping M&A, DeClark said, “We’re approaching a window right now where I think there will be an increase in deal activity.” And on IPOs: “We are starting to see large carve-out IPOs and some sponsored-backed IPOs coming out.”
Ares CEO Says Economy on Good Footing (5:10 p.m. ET)
Michael Arougheti, co-founder and CEO of Ares Management Corp., said middle-market borrowers are still holding up relatively well despite a slowdown in the economy.
His portfolio companies have grown, he told Bloomberg TV at the conference, even as it gets harder for firms to pay off their debts.
“The economy is actually still on good footing,” he said. While higher-for-longer interest rates stand to create more stress, he is “still seeing defaults muted.”
Milken Touts Innovations for Public Health (4:50 p.m. ET)
Michael Milken, the conference’s founder, spoke to Bloomberg TV about his battle with cancer and his belief that the marriage of finance and public health can lead to better drug therapies.
“I think they gave me 18 months,” said Milken, whose book “Faster Cures: Accelerating the Future of Health” chronicles his cancer diagnosis in the 1990s. Milken said the diagnosis made him a champion of science innovation that could improve people’s lives.
Apollo’s Dylan Foo Endorses Infrastructure Investments (4:35 p.m. ET)
Apollo Global Management Inc. sees infrastructure investments in developed nations as a safe bet amid the global turmoil in credit markets.
“It is a little bit more stable but boring asset class,” Dylan Foo, partner and head of infrastructure at Apollo, told Bloomberg TV at the conference. “We talk about roads, bridges, airports, power utilities, but if you invest in the right infrastructure, the asset class is created because people want something of long duration, contracted and downside protected.”
The Biden Administration’s Inflation Reduction Act is providing investment opportunities for Apollo in US manufacturing and renewable power development, he said.
Attanasio Sees Opportunity in Private Credit (4:04 p.m. ET)
Conditions are much more favorable for lending in private markets than investing in public markets, according to Crescent Capital’s Mark Attanasio.
“In private credit, we let the game come to us,” he told Bloomberg TV at the conference. “Almost everything that’s originated is coming our way. We’re not knocking on doors.”
Attanasio said he sees opportunities to find companies that are still in their growth stage at much more attractive valuations, and for higher returns.
“Sometimes those returns can get into the high-teens at six times cash flow,” he said. “That’s like 1980s, 1990s private equity returns.”
Apollo’s Rowan, Cain’s Goldstein Warn of Pain for Offices (3:52 p.m. ET)
Across Wall Street and around the world, executives are increasingly warning of the pain to come for owners of office buildings.
From Apollo Global Management Inc.’s Marc Rowan to Cain International’s Jonathan Goldstein to Citigroup Inc. CEO Jane Fraser, eyes are turning to another source of potential risk: commercial property.
“It’s a bad day to be an office owner in San Francisco and Chicago,” Rowan, co-founder and CEO of Apollo, said Monday at the conference. “We are going to see losses,” he said, adding that the stresses will be concentrated and not systemic.
Pimco and PGIM See Value in CMBS (3:30 p.m. ET)
Investors ranging from Pacific Investment Management Co. to HPS Investment Partners are looking to profit from historic dislocations within corporate credit markets.
“Credit markets are kind of all over the map for good reasons,” Christian Stracke, global head of credit research at Pimco, said during a panel at the conference. “It’s neither hostile or benign, but it is certainly confused — if not in disarray.”
Stracke pointed to opportunities in non-bank commercial real estate assets and high-quality AT1 bonds that have been unfairly punished by recent financial turmoil.
John Vibert, president and managing director of PGIM Fixed Income, also likes AAA-rated commercial mortgage-backed securities. Purnima Puri, governing partner at HPS, said private credit looks especially cheap.
BlackRock’s Conway Says Private Equity Valuations ‘Still High’ (3:21 p.m. ET)
The private equity market continues to have high valuations and firms are having trouble exiting investments, according to a top BlackRock Inc. executive.
“We’re still seeing demand for private equity,” Edwin Conway, global head of BlackRock Alternatives, told Bloomberg TV at the conference. “I just feel the valuations are still high.”
Smaller venture and growth-equity investments have been re-priced, according to Conway — but he hasn’t seen this at the larger end of the market.
“The exits for private equity right now are hard,” Conway said.
First Republic Takeover Will Keep Fed ‘On Track’: Nuveen’s Malik (15:07 p.m. ET)
JPMorgan Chase & Co.’s agreement to acquire First Republic Bank has instilled enough confidence in the banking system for the Federal Reserve to “stay on track,” said Nuveen Chief Investment Officer Saira Malik.
“We put some confidence back into the system today,” Malik said in an interview with Bloomberg TV on the sidelines of the meeting. She expects the Fed to raise interest rates one more time on Wednesday before pausing, adding that the US central bank won’t be in a position to cut borrowing costs before year-end amid persistent inflation.
Still, financial stocks aren’t an area Nuveen is interested in amid tighter net interest margins, higher capital requirements and more competition for deposits, Malik said.
Instead, the asset manager prefers US companies with strong free cash flow, as well as emerging markets, higher-quality junk bonds, private credit and infrastructure investments.
TCW CEO Koch Warns of ‘Major Accidents’ Ahead in Private Credit (2:48 p.m. ET)
TCW Group President CEO Katie Koch said cracks are starting to show in the private credit market and that investors should prepare for “major accidents” in the red-hot sector over the next 12 to 18 months.
Koch said in an interview at the conference that she still thinks the asset class is “one of the great investment opportunities” over the next decade, but only if investors approach it “in the right, conservative way.”
‘Significant’ Economic Slowdown Is Coming, Says Guggenheim’s Walsh (2:40 p.m. ET)
A “significant economic slowdown” is coming, starting around mid-year, said Anne Walsh, chief investment officer for fixed income at Guggenheim Partners Investment Management.
In an environment where “capital is being rationed,” investors with cash to deploy will be able to demand more protections for investors, Walsh said. She expects the Fed to hike interest rates this week and leave room for further tightening but officials probably won’t loosen monetary policy until next year on inflation concerns.
Turmoil in the banking sector isn’t a systemic risk, as it was in the 2008 global financial crisis, but “the situation hasn’t really resolved itself,” Walsh said, pointing to the collapse of First Republic Bank.
What sets the current situation apart from 2008 is the fact that there’s “still so much capital in the system” and a “nimble” Federal Reserve, she said on the sidelines of the conference.
Citi CEO Willing to Adjust Staffing Levels in Investment Bank (2:31 p.m. ET)
Citigroup Inc. CEO Jane Fraser said the company is willing to make adjustments to staffing levels inside its investment bank as the firm and its rivals continue to deal with an industrywide slump in dealmaking and underwriting activity.
The New York-based company no longer expects a rebound in investment-banking activity this year, Fraser said in a Bloomberg Television interview Monday at the conference. Corporate clients continue to be whipsawed by the Federal Reserve’s aggressive push to raise interest rates and the ongoing US debt-ceiling debate, she said.
“Like every institution, you make some adjustments around the capacity, but we’re playing the long game in investment banking,” Fraser said. “The second half is not going to be as strong macroeconomically or in terms of investment-banking wallet and the like that we had hoped.”
Venture Capital Market Is Resetting As Valuations Drop (2:31 p.m. ET)
The venture capital market is seeing a reset after valuations have fallen about in half, said Jamie Montgomery, co-founder and managing partner at March Capital, who says there’s more compression to come.
Valuations had been the highest the venture market had ever seen in 2021, and investors were throwing capital at firms, but that’s changed, said Raj Ganguly, co-founder and co-chief executive of B Capital Group, at a panel of venture capital firms.
Speed of Fed Hikes to Create More Trouble, Bridgewater Co-CIO Says (12:27 p.m. ET)
Credit tightening is still filtering through the economy, and the speed with which the Federal Reserve has boosted interest rates will likely create more trouble, said Karen Karniol-Tambour, co-chief investment officer at Bridgewater Associates.
“Something is bound to break,” she said. “We don’t know exactly what the next shoes to drop are.”
Inflation will probably be higher for a longer period of time, representing a paradigm shift after a long period of low inflation, Karniol-Tambour said. As more economies take steps like decarbonizing and making their supply chains more resilient, inflationary pressure will likely remain elevated. It’s taking markets time to catch up to the higher risk premiums that will result, she said. Gold and silver can offer good inflation protection, she said.
PGIM’s Hunt Says Markets Are Overly Optimistic (12:31 p.m. ET)
David Hunt, CEO of asset management firm PGIM, said that markets are too optimistic now, given the potential for trouble from situations like the US debt ceiling.
“What the market does very poorly is to price in very low-tail events, non-rational actions,” Hunt said, speaking on a panel about global capital markets. That includes the war in Ukraine, he added.
Citigroup CEO Fraser agreed that the debt ceiling situation in particular was worrisome, saying that current negotiations feel different than in the past.
Interest rates will be higher for longer than is currently priced into markets, Hunt said.
IMF Chief Says Rising Rates Exposed Banking Vulnerabilities (11:22 a.m. ET)
The International Monetary Fund’s chief said the rapid acceleration in interest rates “exposed vulnerabilities in the financial sector,” adding that the banking industry needs to be on watch for additional risks.
Industry leaders need to “anticipate shocks and be ready to act when they occur, because they will be coming,” Kristalina Georgieva said in an interview with Stephanie Flanders, the head of economics and government at Bloomberg News, at the Milken Institute Global Conference.
“What we have lived through in the last years has been a series of unthinkable events,” Georgieva said. “The pandemic, the war in Ukraine, the rapid jump of interest rates after many, many years of staying low.”
--With assistance from Jenny Surane, Gerson Freitas Jr., Mark Chediak, Liana Baker, Allan Lopez, John Sage, Dayana Mustak, Michael B. Marois, Eric Martin, Enda Curran, John Gittelsohn, Richard Annerquaye Abbey, Allyson Versprille, Katanga Johnson, Eliyahu Kamisher, Olivia Raimonde, Sonali Basak, Stephanie Flanders, Sydney Maki, Michael Tobin, Taryana Odayar, Courtney McBride and Allison McNeely.
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