Rubeli: Lofty prices plague opportunities

Inflated valuations for target companies means GPs have to be increasingly selective in their investments, says Partners Group’s Christoph Rubeli.

Asset inflation in developed economies has made acquiring target portfolio companies at attractive prices increasingly difficult, especially in the large end of the market.

That’s according to Partners Group co-chief executive officer Christoph Rubeli, who spoke on a conference call with reporters Tuesday.

The soaring valuations come as a result of high levels of private equity dry powder, excess cash on the balance sheet of corporates and improved credit conditions, according to industry sources.

“Valuations are high [and] you are not going to be able to escape that fully,” Rubeli said, adding that the only way to avoid overpaying for assets is to develop proprietary deal flow outside auctions.

In Europe, Partners Group remains most active in Northern Europe, according to Rubeli. “The [German speaking] region has been a great region [during] the last year and there’s a pretty decent pipeline of further transactions that we’re currently working on, but it is obviously an area where you have to be very selective in the sectors that you look at…If you find the right sectors and reasonable valuations and growth prospects then it’s a very attractive region.”

While quantitative easing – a monetary policy in which a central bank buys government securities from the market to increase the money supply – has helped stimulate the economy in Europe and the US, it has also fuelled higher prices for companies that have not generated significant earnings growth, according to Charles Dallara, a partner and chairman of the Americas at Partners Group.

“If you look at the S&P 500 Index, the [earnings] movement has been pretty remarkable, particularly in 2013. Less than 20 percent of it accounted for earnings growth. 81 percent of it is reflected in multiple expansions. The bulk of what we seen in asset inflation has been liquidity fuelled not fundamental [growth],” he said.

“What worries me is the lack of focus on …. debt problems [that are] not being solved. I am not talking about the Greece and Spain’s of this world, but I am talking about the US. What are the choices that will ultimately be made? It is highly likely that when markets will become anxious they will create some volatility that we better get prepared for,” Dallara added.