Mergers and acquisitions and private markets will rebound when the next Federal Reserve chair is appointed, according to Marathon Asset Management LP Chairman Bruce Richards.
Bringing down financing costs will boost transaction activity, increasing distributions to investors in private equity and making it easier for companies to repay their debts, he said in an interview with Bloomberg Television.
“It’s going to be a bonanza” moving forward “for the LBO and buyout community and for private debt lenders,” he said, referring to leveraged buyouts. “And the businesses will enjoy better free cash flow when they have less debt service with a lower debt structure.”
Many private equity firms were caught out when central banks rapidly raised interest rates to combat inflation following a surge in consumer prices during the Covid pandemic. The end of the easy-money era made some valuations more difficult to justify, leaving managers unable to exit some investments and crimping their ability to raise more money. M&A deals plunged as a result.
“It’s been a tough stretch for LBOs,” Richards said. “I think that’s behind us.”
Richards sees the next Fed chair buying up long-dated US Treasuries in an effort to reduce borrowing costs. A balanced mixture of inflation and lower rates will benefit the government because it will allow them grow their way out of the deficit, he said.
“I think the next Fed chair is going to do probably QE with a twist, and the twist is buying longer-term Treasuries to bring those rates down,” he said. “The easing cycle will last for some time.”
That would help revive mid-sized companies, housing and the commercial real estate markets, he said.
There’s a $3 trillion spending need for data centers in the US in the next four years, half of which will be debt, he said. Securitization markets will receive a boost, with $100 billion likely to end up in the commercial mortgage-backed securities market, he added.
The firm is focused on lending to stable, well capitalized companies in the data center space rather than young firms that don’t have a clear path to revenue, he said.
While there are fears about the impact that private markets could have on the economy, Richards is more relaxed.
“Definitionally, there cannot be a bubble in private equity” because they tend to pay an average of 11 times earnings for acquisitions compared with much higher multiples paid by other bidders, he said. However, there will be some cases of overpaying for firms, he said, citing the technology and venture sectors.
