The listed private equity firms in the chart are: Blackstone Group, Partners Group, Brookfield Asset Management, 3i Group, KKR, Apollo Global Management, Intermediate Capital Group, FS KKR Capital, Ares Capital, and Owl Rock Capital
The chart above shows the 10 largest listed private equity firms on their median price-to-book ratio showing that the industry just hit the highest measure price-to-book ratio on record at 2.4x compared to 0.9x in January 2013 and an average of 1.5x over the entire period. Higher price-to-book values can mean many things but the core signal stemming from the Dupont model is that the expected return on equity is going up; this could be because more portfolio companies are becoming digital companies although that is not what we generally observe. Alternatively, the higher price-to-book ratio could mean that there are more intangible assets not showing up on the balance sheet. Whatever the explanation is private equity firms are historically expensive and have high return expectations. They also have considerably financial leverage as KKR’s balance sheet shows and debt leverage has rapidly increased since 2012, but the lower interest rates have kept a lid on interest expenses. In other words, private equity firms have enjoyed the tailwind of monetary policy.
The US economy is the hottest since 1984
The talk is all about inflation these days. While supply side effects are a big part of the current inflationary pressures the demand side is also strong driven by fiscal stimulus. Due to debt saturation in the economy the credit growth cannot be a meaningful amplifier of inflation in the developed world, so it must be direct stimulus from the fiscal side. But how big is the current stimulus?
The broadest measure of the US economy is the Chicago Fed National Activity Index measuring 85 indicators on the US economy with positive values meaning the US economy is growing above trend growth. The three-month average is currently 0.81 which is the highest since 1984, so the US economy is currently expanding at a rapid pace. This aligns well with estimates that the US economy by Q4 will operate well above its GDP potential which at that point will add further to inflationary pressures. The current macro indicators on the US economy also suggest that we will get a very strong Q2 earnings season which starts in three weeks from now.