The Milken Institute Global Conference is wrapping up its second day in Beverly Hills, bringing together an eclectic mix of attendees, from dealmakers to celebrities.
(Bloomberg) — The Milken Institute Global Conference is wrapping up its second day in Beverly Hills, bringing together an eclectic mix of attendees, from dealmakers to celebrities.
Speakers scheduled for the final day of the conference on Wednesday include Chelsea FC co-owner Todd Boehly, Snoop Dogg and World Bank President David Malpass.
KKR’s Stavros Sees More PIK Toggles on Senior Loans (8 p.m.)
Borrowing costs for companies have risen so dramatically that KKR & Co. has started to see loans at the top of the capital structure come with non-cash payment terms because the interest cost-burden is so high, according to the firm’s co-head of private equity.
More senior loans are being originated with a payment-in-kind option as all-in costs for senior loans have risen to 600 basis points over the benchmark, Pete Stavros, co-head of global private equity at KKR, said at the conference. So-called “PIK toggle” debt — which allows borrowers to accrue additional interest expense rather than making a cash payment — has traditionally been the domain of subordinated loans.
“It’s certainly not sustainable,” Stavros said. “If rates and spreads were to sustain themselves with these levels, I don’t care how good the company is, they’re going to have such a big step up in financing costs, they’re going to have to take the debt down unless they have a massive equity cushion built up.”
Oaktree’s Panossian Cautions More ‘Stress or Distress’ to Come for Some Borrowers (1:30pm)
Some portfolio companies are feeling the pressure of higher interest rates and will likely need a fresh equity injection over the coming years, according to Oaktree Capital Management’s head of performing credit.
“Some businesses that were bought out several years ago when the equity checks were lower because borrowing rates were lower, those capital structures are underwater or upside down at this point and probably in need of additional equity capital in the next few years,” Armen Panossian said in a Bloomberg Television interview at the conference.
These companies are trying to manage their employment profiles, pass through cost increases when possible and only engage “when necessary” with lenders regarding amendments or waivers, according to Panossian.
“Sometimes the private equity firms are stepping up with additional capital to support those businesses,” he said. However, he cautioned that “more is yet to come” in terms of “stress or distress” for those borrowers.
California’s Newsom Warns of Regulating AI Before Its Understood (4:30)
The biggest mistake politicians make is to overregulate emerging technologies before understanding them, said California Governor Gavin Newsom at the conference.
Newsom, a Democrat, said Californians are proud to dominate in the artificial intelligence industry.
He also said he’s “sensitive to the concerns of the writers” over implications of AI adoption in the entertainment industry, and that the state is standing by to intervene in the Hollywood writers strike if called upon by both sides.
“We are very concerned about what’s going on because both sides are dug in,” he said.
Friedman Warns of Commercial Real Estate ‘Carnage’ (3:40 p.m. ET)
While corporate debt issuers can muddle through an era of higher interest rates, portions of commercial real estate are barreling toward trouble, said Josh Friedman, co-founder and co-chief executive officer of Canyon Partners.
“In the beginning of any downturn, the first things that come to light are the worst problems,” he said in a Bloomberg Television interview at the conference. “There’s going to be carnage in some parts of the commercial real estate business.”
Coinbase’s Choi Says Things Inevitably Come Back Up (3:30 p.m. ET)
Coinbase Global Inc. Chief Operating Officer Emilie Choi said the company makes strategic investments even during difficult time periods because “things always inevitably come back up.”
“The way we do resource allocation is 70-20-10 — 70% core, 20% strategic adjacency, 10% venture — so that we are investing in the near-term ROI opportunities during these cycles, but we are also making sure we invest in the future,” she said. Coinbase acquired One River Digital Asset Management in March, for example.
As for recruitment, Coinbase selects talent based on their resilience and grit, she said.
“Because we have such a volatile type of business to run, people have to be mission-driven and not mercenaries,” Choi said.
Khosla from Strategic Value Partners Sees a Grind Ahead Like The Dot.Com Bust (3 p.m. EST)
The current economic cycle will resemble the dot-com bust, according to Victor Khosla, chief investment officer and founder of Strategic Value Partners.
“This is a grinding down and a grinding up. It’s a three, four year cycle much more like 2002 than any of the things we’ve experienced since then,” he said on Bloomberg TV on the sideline at the conference.
After pulling back last year — Khosla said his fund only invested around $1 billion in last nine months of 2022 — the firm has invested $1.2 billion in the first four months of 2023. In a good year, the firm will invest between $6 and $8 billion, he said.
Khosla said the pipeline of opportunities is opening up and not just in discounted debt but also in assets like airplanes or infrastructure.
Calstrs CIO Says Funds Navigating Red, Blue State Divide (3:30 p.m. ET)
Government-worker funds and their partners are having to increasingly navigate political decisions that dictate investment decisions, such as restrictions on ESG money in Republican-led states and limits on fossil-fuel markets in states where Democrats are in charge, said Christopher Ailman, chief investment officer for the California State Teachers’ Retirement System, the second-biggest US public pension, with about $307 billion in assets.
“In Canada, it’s not uncommon to have bilingual marketing brochures in French and English, but now they have in the US one marketing brochure for red states and another one for blue states,” Ailman said at the conference. “And that’s really sad.”
Churchill CEO Touts Opportunity in Private Credit Markets (2:40 p.m. ET)
Private credit is currently offering the best opportunities in years, Ken Kencel, president and chief executive officer of Churchill Asset Management, said at the conference. He warned of some consolidation in the asset class as large players in the market overtake their smaller competitors.
In an interview with Bloomberg Television, Kencel touted investment opportunities in software, business services, logistics and health care. He said he especially likes companies that have performed well in a high-interest-rate environment.
Allen Wants to Buy BET, Says It Should Be Black-Owned (2:30 p.m. ET)
Byron Allen, comedian, TV producer and media mogul, says he’s interested in acquiring BET Media Group, the Paramount Global unit that runs the cable TV channels Black Entertainment Television and VH1.
“This is a phenomenal asset, they’re running a process, we’re part of it,” Allen said in a Bloomberg Television interview at the conference. “This is something that used to be Black-owned, and now is the time for it to go back into Black ownership, which is very important.”
Paramount is considering selling a majority stake in BET. Actor and filmmaker Tyler Perry, who is an investor in the company’s BET+ streaming service, has also had discussions about buying a stake in the larger enterprise. Allen Media Group LLC controls dozens of TV stations and other assets, including the Weather Channel cable network.
Apollo’s Drescher Says 60/40 Model Has Been Challenged (2:15 p.m. ET)
Individual investors no longer have to stick to stocks and bonds, according to Stephanie Drescher, chief client and product development officer at Apollo Global Management Inc.
“The 60/40 model has been challenged,” she told Bloomberg Television at the conference.
The Apollo senior partner spoke to Bloomberg the same day the firm said it’s opening some of its funds to individual investors in Europe, Asia and Latin America as it continues to grow its wealth management business.
Read more: Apollo Opens Private Market Funds to Wealthy Investors in Europe
“We wanted to ensure that everyone could have access to that potential additional return,” Drescher said, adding that “ensuring that we can provide that diversification for the individual — not only the institution — is critical.”
Scharf Says Regulators Acted Correctly on Banks (2 p.m. ET)
Wells Fargo & Co. Chief Executive Officer Charlie Scharf said US banks such as his shouldn’t be required to “unconditionally” cover the failures of other financial institutions.
Regulators functioned as they were supposed to as three banks — Silicon Valley Bank, Signature Bank and, most recently, First Republic Bank — failed over the past two months, Scharf said Tuesday during a panel discussion at the conference. The Federal Deposit Insurance Corp. stepped in when required, he said.
Scharf’s remarks come a day after JPMorgan Chase & Co. agreed to acquire First Republic in a government-led deal for the failed lender, putting to rest one of the biggest troubled banks remaining after turmoil engulfed the industry in March. Wells Fargo was one of 11 banks that had tried to keep First Republic afloat by pledging $30 billion of fresh deposits on March 16, with Scharf’s company kicking in $5 billion.
The majority of banks that Wells Fargo is monitoring at the moment are “strong,” Scharf said.
Vista’s Breach Looking for Deals in Public Market (1:30 p.m. ET)
Vista Equity Partners President David Breach said his tech-buyout firm is looking to acquire publicly traded companies amid the recent market turmoil.
“The real opportunities right now are in the public market,” Breach said in a Bloomberg Television interview at conference. His firm recently purchased insurance-software business Duck Creek Technologies and cybersecurity training provider KnowBe4.
While buyout shops are finding discounts in public markets, it’s harder for them to wrangle a deal with closely held startups, many of which are reluctant to accept the prices buyers are willing to pay. Breach said valuations have further to drop.
“Later this year they’re going to start to feel pressure,” he said, “and they are going to have to accept the market they’re in.”
Citadel’s Mecane Sees ‘Robust Pipeline’ for Going Public (1:30 p.m. ET)
Activity in the public markets could pick up as more firms choose to list their shares on a stock exchange, according to executives at the conference.
“There is definitely a robust pipeline of companies looking to go public, which is reassuring,” Joe Mecane, head of execution services at Citadel Securities, the market-making firm founded by Ken Griffin, said on a panel discussing the capital markets.
A growing number of security filings are showing plans to flip “from private to public, and people are looking for that window,” he said.
Firms looking to go public are spending more time engaging with investors early, according to Ashley Walker, head of equity syndicate and privates at Jefferies.
“We’ve got a deal that’s going to launch in June,” Walker said. “There’s a lot of testing the waters going on right now, because the market has been closed for so long.”
Jefferies’s Roop Says SVB Reminded Him of Bear Stearns (1 p.m. ET)
Fallout from the regional-banking crisis has continued to sully public markets and sentiment for transactions.
The demise of Silicon Valley Bank and First Republic Bank is ultimately just “another check mark in the uncertainty box,” Candice Choh, partner at global law firm Gibson, Dunn and Crutcher LLP, said on a panel at the conference about about mergers and acquisitions.
Jefferies LLC’s head of Americas M&A, Chris Roop, said “the Sunday of SVB felt very similar” to when Bear Stearns & Co. collapsed during the financial crisis. Roop spent his early career working in Bear Stearns’s investment-banking group, his LinkedIn profile shows.
While deal activity has slowed from a record two years ago, panelist said the appetite is still there. Activity could emerge in the form of restructurings, they said.
Mark McMaster, global head of mergers and acquisitions at Lazard Ltd., said even companies with high multiples can still do deals that work. Market valuations are down but so are those of the potential targets, he said, so transactions can get done without leveraging up balance sheets.
Wynn, Carnival CEOs Say Travel Demand Is Surging (12:30 p.m. ET)
Demand for travel and related services is soaring from the lows reached during the pandemic, according to panelists at the conference including Wynn Resorts CEO Craig Billings and Carnival Corp. CEO Josh Weinstein.
Travelers emerging from lockdowns are also asking for more personalized experiences relating to seamless airport check-ins, destination choices and other hospitality services driven by technological improvements, panelists said.
The discussion also featured Clear CEO Caryn Seidman-Becker and Singapore Tourism Board’s Keith Tan.
Guggenheim’s Walsh Sees Rising Credit Risks (12:30 p.m. ET)
The default rate across speculative-grade credits could rise to 5%, Walsh at Guggenheim said.
“It is going to be pretty painful as downgrades increase,” Walsh said on a panel discussion at the conference.
A significant amount of private debt will need to be refinanced over the next two years, Michael Patterson, a governing partner at HPS Investment Partners, said during the panel discussion.
Higher interest rates — which make loans more expensive — stand to increase financing and liquidity needs, especially in sectors such as technology, Patterson said.
Dragoneer’s Stad Sees Reckoning for Private Markets (12 p.m. ET)
Private markets are facing a major reckoning following speculative deals in industries such as crypto, according to Marc Stad, founder and managing Partner of Dragoneer Investment Group.
“Let’s be clear, there are companies valued in the billions in the venture world at scale,” Stad said in a panel discussion at the conference. “They’re going to go to zero. They aren’t worth it.”
But Dana Settle, co-founder and managing partner at Greycroft, sees a lot of promise in artificial intelligence, an area that she says isn’t over-hyped despite the massive buzz around it.
“I’m sure somebody was counting to see how long it would take for us to mention AI,” she said, adding that companies are already embracing the technology and using it to improve their businesses.
Carlyle’s De Benedetti Sees Europe Opportunities (11:40 a.m. ET)
Despite recession concerns in the US, there are still “very interesting opportunities” in Europe, according to Marco De Benedetti, co-head of Europe private equity at Carlyle Group Inc., who sees the continent doing better than some have predicted.
Europe will benefit from more tourism from Asia, and the luxury market will be more resilient in the event of an economic slowdown, De Benedetti said in a Bloomberg TV interview at the conference.
De Benedetti also said private credit will take a larger share of financing because banks have been suffering, especially as European lenders are “not as concerning” as US-based ones. “I don’t see financing as the biggest concern in the ability to do deals,” he said.
KKR’s Pietrzak Sees Volatility Through Year-End (11 a.m. ET)
Daniel Pietrzak, partner and co-head of private credit funds at KKR & Co., said the debt-ceiling impasse will cause short-term volatility.
“The debt ceiling will be the conversation short-term,” Pietrzak said in a Bloomberg TV interview at the conference. “I suspect it will get solved, but it will create volatility the market doesn’t like.”
Pietrzak said volatility will continue through the end of the year, but it’s a time when private credit managers can shine.
Speaking about regional-bank turmoil, it “will play out for several quarters if not several years,” Pietrzak said. “I think the market needs to get comfortable on what returns they can generate going forward.”
Vistria’s Anadu Sees Regional-Bank Risks (10:45 a.m. ET)
Margaret Anadu, senior partner at Vistria Capital, said regional banks are a major concern for the real estate market because they are so interconnected.
People think about capital coming into commercial real estate from the big banks, but more than 80% of the lending in the US is from banks with $250 billion in assets or less, Anadu said in a Bloomberg TV interview at the conference. “It’s causing a lot of concern, and it should.”
There’s opportunity in focusing on low- and moderate-income Americans who plan to remain in their homes and not move from places like New York to Florida on a whim, she said.
Hunter Point Cites ‘Asymmetric’ Bank Risk (10:35 a.m. ET)
Hunter Point Capital co-founder and Executive Chairman Bennett Goodman said the regional banking crisis is probably not yet over as the banking system faces “asymmetric risk.”
JPMorgan Chase & Co., Bank of America Corp. and other major US banks have become “systemically too important to our economy and they cannot ever fail,” Goodman, a co-founder of Blackstone Inc.’s credit arm, said in a Bloomberg TV interview at the conference. Meanwhile, “the same cannot be said of some of the regional banks.”
“We need to figure out how to level that playing field,” Goodman said as regional banking stocks slid.
–With assistance from Sydney Maki, Katherine Doherty, John Sage, Francesca Maglione, Allan Lopez, Erin Hudson, Natalie Harrison, Paige Smith, Daniel Taub, Richard Annerquaye Abbey, Romaine Bostick, Taryana Odayar, Dawn Lim, Thomas Buckley, Kamaron Leach, Erin Fuchs, Yueqi Yang, Michael Tobin, Dayana Mustak, Michael B. Marois and Olivia Raimonde.
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