At 7 a.m. Monday, Marc Rowan, chief executive officer of Apollo Global private equity grouptook to the stage in Beverly Hills and warned his fellow financiers that a decade of virtually uninterrupted disruption in financial markets was coming to an end.
The stock market will continue to fall, Rowan told the Milken Institute Global Conference, as rising inflation wreaks havoc on the global economy and the US Federal Reserve is forced to respond by raising interest rates.
“There will be more adjustments to come,” said Rowan, whose $513 billion asset management firm. “We are a long way from the media and the media when it comes to stock market valuations,” he said. “In the credit market, we have a long way to go.”
It was in stark contrast to the mood just seven months earlier at the same venue, the Beverly Hilton, when traders gathered for the Milken Institute’s October conference celebrating soaring financial markets and record activity corporate mergers and private equity purchases.
Now, top executives at Apollo, Guggenheim, and Bridgewater have viewed their discussions with “recession,” “adjustment,” “a dark place.” It’s reminiscent of the upset in 2008 when they could feel the music coming to a halt.
“We are coming out of happy times with negative interest rates and massive public spending supporting the economy and mitigating risks,” said Mathieu Chabran, co-founder of private equity group Tikehau Capital. “We’re all dealing with a big hangover now.”
Investors can no longer count on ever-increasing stock market multiples to drive their returns. Meanwhile, lenders are poised to ease unprecedented cash flows to finance corporate takeovers as credit conditions tighten.
Much of the pessimism stems from events few traders could have predicted, such as Russia’s invasion of Ukraine, which sent energy and fertilizer prices up, leading to inflation that could send Economies across Asia, Europe and Africa entered recession and stagnated growth in US.
With inflation well above its 2% target, the Fed is raising rates, a move many worries will lead to recession.
“The Fed is going to have to be extremely aggressive,” said Scott Kleinman, co-chair of Apollo. “They will trigger a recession before they allow inflation to go away.”
By contrast, Bridgewater’s top strategist, Rebecca Patterson, warned of the risk of stalling inflation as global trade flares up. She said she left the IMF and World Bank spring meetings last month “in a dark place”.
The threat of a decline has rocked the junk bond market, a key source of funding for buybacks. Many attendees forecast a slowdown in leveraged buybacks as lenders reduce their debt.
“It has the initial feel of a credit risk reassessment,” said Todd Lemkin, chief investment officer at Canyon Partners, who told the committee. Bank risk committees are likely to roll back their funding commitments. “The party looks like it’s going to stop, or pause, at least for a bit.”
Private equity firms signaled concern that cash inflows into the acquisition industry would slow.
As one prominent trader noted, there are more than a dozen private equity firms trying to close new capital raisings of $15 billion or more. At the same time, investors have been drastically reducing their holdings of public stocks at a much faster rate than their private portfolios, making them more likely than ever to buy up. Apollo recently warned that its new private equity round will take longer than previously expected to close.
By the pool, it doesn’t look so bleak. Around midday on Monday, Apollo Global co-founder Leon Black was eating sandwiches at the table with Nelson Peltz, the activist billionaire investor, and his lieutenant and son-in-law Ed Garden.
Financial giants like Black and Peltz regularly travel to Beverly Hills for conferences, chaired by bond pioneer Michael Milken, who built their careers during the 1980s at the premier bank. by Drexel Burnham Lambert.
Drexel went bankrupt in 1990 when Milken pleaded guilty to breaking securities laws, but his financial innovation became an unstoppable force. Petty debt financing, fueled by the era of bottoming interest rates, is now a market worth more than $4 billion.
On Wednesday, Milken and Howard Marks, co-founders of Oaktree Capital, reminisced about old financings such as for sewing machine maker Singer and machinery giant International Harvester. Trades go back to a time when inflation was last high and the Fed cut investors’ “animal spirits”.
As the pair recalled the days just before a bull market that spanned more than three decades with risky debt that made them both billionaires, Fed chair Jay Powell announced a 50 basis point hike in interest rates and announced signal more interest rate hikes to come.
Many of the younger attendees had never known such a market.
“If you’re under 34, you’ve never invested in your career in a bullish or bearish market environment,” says Apollo’s Kleinman. His boss Rowan says he carries a running joke in the company: “You’ve worked for me for 10 years and I still don’t know if you’re a good investor.”