Billionaire investor Howard Marks has warned that private-equity companies are currently paying too much for deals, and lowering their standards in doing so, partly because they are finding it so easy to raise money from investors. “When there’s too much money around, it creates really bad things,” he tells the Financial Times. “You’ve got to think of the markets like an auction. There is an opportunity to lend money. Who gets to make the loan? The person who will accept the least.”
In effect, private-equity groups are under pressure to put investors’ money to work. They are also keen to get deals done in order to generate more fees – but there just aren’t enough worthwhile deals to go around, says Marks. “There is more money than there are good ideas.” As a result, “they are paying record-breaking multiples” of earnings for companies, and also accepting less favourable terms in order to secure the business in the face of tough competition. That could get very ugly when the next downturn comes along, says Marks. “You’ve got to worry when we are in the tenth year of an economic recovery.”
Marks made his money and his reputation by investing in distressed debt, and also foresaw both the dotcom crash in 2000 and the subprime mortgage collapse that led to the financial crisis. It’s worth noting that he has been cautious on financial markets for some time, although he has been careful to steer clear of using the word “bubble”. In his most recent memo to investors, published in January this year, he noted that “it feels as if we may get through the next 18 months without a recession, but if we do, that’ll make this the longest economic recovery since the 1850s. Certainly not impossible, but against the odds.” As a result, when it comes to investing, he said, “I would favour the defensive or cautious part of the spectrum”.