DALLAS (Reuters Breakingviews) - Like any good private-equity investor, Carlyle has demonstrated a knack for buying when others are selling, and vice versa. It’s instructive then that the firm led by David Rubenstein is embarking on its biggest quest for distressed assets at a time when tax-cut hopes are fanning Wall Street euphoria. The $2.5 billion fund is a good reminder that lofty valuations, an aging recovery and a chaotic new administration can produce bad outcomes.
The new vehicle dwarfs Carlyle’s 2011 distressed fund, a $700 million one. With rich pickings still available in the aftermath of the financial crisis, that vehicle has generated a 21 percent annualized return after accounting for fees - an impressive accomplishment given that 10-year Treasury yields traded narrowly around 2 percent for much of that period.
Today rates are rising amid expectations that President Donald Trump will stoke economic growth with tax cuts. U.S. stocks are on a record-setting tear, with the S&P 500 Index up 10.5 percent since the election and the Dow Jones Industrial Average rising 13.5 percent. Bankruptcy filings by publicly listed companies fell by a third last year and are running at barely a quarter of the pace of 2009, at the height of the crisis.
Yet it’s precisely that ebullience that indicates Carlyle’s timing is good. The president’s struggles to get his cabinet seated and backlash over his immigration order suggest tax reform is hardly a slam dunk. The S&P is trading at nearly 29 times Robert Shiller’s cyclically adjusted price-to-earnings ratio, a level exceeded only during the tech bubble at the turn of the century and just before the 1929 crash, according to the Yale economist’s data. If bankruptcies appear to have nowhere to go but up, they just might.
Carlyle isn’t the only firm to turn its eye to the distressed market. In 2016, firms raised more than $16 billion to invest in struggling assets, a 300 percent jump from 2015, according to Thomson Reuters data. If past cycles are anything to go by, that powder won’t stay dry for long.