The debate about private equity’s economic cycle: UPDATED

Listen to some, like TPG Capital Founding Partner David Bonderman, and private equity is somewhere in the middle of its cycle.

Capacity utilization globally is low, wages are feeling little upward pressure and inflation is tame, he said at the SuperInvestor U.S. 2015 conference at the Four Seasons Hotel in San Francisco.

Talk to others and a different story emerges. Valuations are as high as they have ever been, the capital overhang at U.S.-based buyouts funds is increasing and fundraising is on the rise.

With interest rates poised to increase, the time is right to “sell everything that is not tied down,” said Andrea Auerbach, a managing director at Cambridge Associates.

The dueling views came front and center at the event, where general partners and LPs discussed the current state of the business. For one manager, the roughly 80 private companies with valuations of a $1 billion or more suggest a bubble.

For others, investments with stretch valuations can look good in as little as nine months as companies grow to match their value.

Here are several observations on both sides of the debate from Auerbach:

• The capital overhang at U.S.-based buyouts funds is $441 billion, raising concerns about where the money is going.
• Distributions from U.S.-based buyouts funds reached an estimated $149 billion last year, an impressive number and an advance from $134 billion last year.
• Distributions from U.S.-based venture funds also appeared to rise smartly. Auerbach estimates venture funds sent $29 billion to LPs in 2014, a jump from an already substantial $22 billion in 2013.
• Venture portfolios are filled with 8,000 companies, or unrealized investments. At the historical average of 96 IPOs a year, they create an 83-year supply.

For Dixon Doll, partner emeritus at DCM, venture returns can continue to be attractive.

A lot of money is going into high profile companies and burn rates are getting “cranked up,” he said. Some companies will hit the wall.

But now is a good part of the cycle to lock in investment returns. “We’re in a good environment now but people are going to have to exercise discipline,” Doll said.

Story updated to include comments from Dixon Doll.

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