Inside a massive gathering of top private-equity players, where slumping returns and coronavirus concerns are dominating conversations

Informa Connect Global Finance

SuperReturn in Berlin.

• The blowout private-equity confab, SuperReturn, is underway in Berlin, Germany, and Business Insider was on the ground to document the opening day.
• Just before kickoff, attendees were hit with news that would hang over the day's events: reports that coronavirus was spreading, with more than 80,000 people infected, and a Bain & Co report that US private equity returns essentially matched US stocks the past decade.
• Kewsong Lee, co-CEO of The Carlyle Group, said that his firm was monitoring portfolio companies and doing everything it can to help its employees through the Coronavirus scare, but expressed optimism as well. He said he expected the global economy to power through the upheaval.
• Below we set out to chronicle the big takeaways from the day's events, with quotable sound-bites from private equity's glitterati.

Just before the start of SuperReturn, the annual private-equity confab that's drawing thousands of investors, lawyers and consultants around the world, attendees were hit with news that would hang over the day's events.

The World Health Organization announced that coronavirus cases outside China were accelerating, infecting about 80,000 people in nearly 40 countries, with at least 2,600 people dead. That caused global stocks to tumble.

At the same time, an industry report from consulting firm Bain & Co offered a worrisome outlook on the state of private-equity investing.

Its findings showed that U.S. buyout funds essentially matched U.S. stocks over the past 10 years, and that PE shops were having a harder time getting good returns, given the amount of dry powder - more than $1.5 trillion - which has driven up prices for deals.

"If you draw a trend line between the 10-year return in 1999 and the 10-year return today, it would show a decline of 6 percentage points over that period," the authors of the report wrote.

These topics kept cropping up throughout the first day of the SuperReturn conference here in Berlin, where CEOs and other executives of some of the largest private-equity shops have flocked to network, do deals, and market their businesses.

Taking the stage Wednesday, Kewsong Lee, co-CEO of The Carlyle Group, told Bloomberg anchor Matt Miller that he was concerned about the coronavirus, especially as it affected Carlyle employees, but that he thought the global economy would power through the upheaval.

"My guess is the impact will be greater than people think because this is such an unknown and uncertain situation that's still evolving," said Lee. "People are just starting to appreciate the magnitude."

Carlyle is monitoring its portfolio companies carefully, he said, and with travel down, logistics and supply chains have been disrupted, he said.

"You can't have 40, 50 percent of the world's second-largest economy be sequestered in the way it has been and not have an impact globally. You can't have an economy that in some shape or form touches 55 percent of manufacturing output globally, and not have an impact on the world."

But he also expressed some optimism.

"Yes, the short-term impact is quite real, but the central banks are being accommodative," he said in an attempt to quell fears of its toll on the economy, noting that we should "continue to see low, steady growth over the long-term."

As for the Bain report, Lee said private-equity has outperformed the public markets historically, and that the amount of private deal opportunities has expanded along with the amount of capital ready to deploy, so it didn't necessarily mean doom and gloom for PE investors.

"The real question isn't, 'Can we put it to work?" he said. " I can put a lot of money to work tomorrow. The issue is what are the right situations to put our capital into? Because driving value and creating returns when we are paying such high prices are exceptionally difficult."

Those comments were just a few of an action-packed first day at SuperReturn, chock-full of speaking engagements and quotable sound-bites from private-equity's glitterati.

The event was held mostly in a large dark room with five big screens behind the main stage, featuring video of panel participants so the whole room could see.

Walking throughout the conference, held in the spacious ground-floor of the InterContinental Hotel, one could pick up on some of the biggest topics that were top of mind for attendees.

Of course, many held private meetings in executives' hotel suites a quick elevator ride away, ready to sell their funds to prospective investors, or talk about a proprietary deal.

But there was also industry chatter, including worries about what might happen as we reach a late economic cycle, and how private-equity firms are positioning themselves for a downturn.

Jeff Aronson, co-founder of Centerbridge Partners, expressed as much on stage when he spoke to how his private equity firm of more than $25 billion in assets under management, was increasingly structuring deals with layers of credit and equity to protect the firm in the event their investment cratered in a recession.

These so-called "structured equity" deals have expanded at his firm, he said.

Historically these deals consisted of about 37% of Centerbridge's investments, he said, but last year they made up about half of the capital Centerbridge deployed.

The reason?

"Because we don't know what will happen, we would rather trade some upside for some downside protection," he said.

Aronson likened the activity to buying insurance on your home when there hasn't been a fire for years. Some might decide that they've wasted money on premiums and stop paying insurance.

"We don't think that way," he said. "Even though we may have given up some upside, that downside protection, which we have not had to avail ourselves to, we think is really valuable."

One side-effect of the economic cycle is that Centerbridge is not doing any distressed-for-control investing, given that, in Aronson's words: "if you're a troubled company in today's U.S. economy, there is probably something deeply wrong."

To make sure PE shops get their investments right, executives should be laser-focused on finding healthy streams of positive free cash flow in companies they invest in, said Aronson and other speakers.

"Every time investors get disconnected from cash flow, they lose money," said Michael Arougheti, CEO of Ares Management, in an interview with John O'Sullivan, a columnist with The Economist.

"Go back to the simple understanding that the way we pay back a loan is through cash flow and the way we create sustainable value ... Nobody gets hurt and we all do well."

For the most part, though, many PE execs seemed little-fazed by how it's getting harder and harder for private equity to achieve high returns.

Regarding the Bain report, Leon Black, CEO of Apollo Global Management, said that when he saw the news that public equity performed better than private equity, "my feeling was, 'great.'"

"Sometimes the Celtics win. Sometimes the Lakers win," he jokingly told his interviewer, Hartley Rogers, chair of Hamilton Lane.

"Even the Knicks win some 50 years ago. Which is a sad story for me as a New Yorker, but a good memory."

Black pointed to all the take-private deals PE shops do - Apollo alone did 80 over the past three decades, he said - as well as IPO exits.

"Having a robust public market is in everybody's interest," he said.

NOW WATCH: 9 of the most exclusive Disney spots to visit, including the invite-only Cinderella Suite where Tom Cruise and Mariah Carey have stayed