The Private Equity Bubble: When Price Stops Mattering

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The private equity boom—fueled by years of cheap money and reckless valuations—may be nearing its reckoning. With 19,000 firms chasing deals at absurd multiples, inexperienced “PE bros” buying everything from HVAC shops to investment firms, and talk of slipping private equity funds into 401(k)s, the setup looks ominous. As returns lag and loans come due, who will be left holding the bag when the music stops?

Episode Transcript

Speaker 1 (00:00):
The Watchdog on Wall Street podcast explaining the news coming
out of the complex worlds of finance, economics, and politics
and the impact it will have on everyday Americans. Author,
investment banker, consumer advocate, analyst, and trader Chris Markowski.

Speaker 2 (00:16):
So, how will the private equity bubble? And question that
I am getting often and I don't know. I don't know.
I'm sorry, folks. I wish I could. I wish it
could be more useful when it comes to information. I
don't have a clue on how it's going to end.

(00:39):
I'm scared. I've let it be perfectly clear to everybody
out there. I know what they're up to. There's this
grand push, grand push to get alternative investments into everyone's accounts,
and it's being pushed out there by everyone saying how
wonderful it's going to be, how terrific it's going to

(00:59):
be once the masses can have all of these wonderful
private equity companies in their four one ks and iras.
And right now, the custodians, I'm telling you, right now,
the custodians are a little bit spooked, quite frankly, and

(01:19):
I get it. They're looking they're looking for a complete
get out of jail free type of a situation. However,
they might be presented with that, but all's fair, all's
fair and love and war when it comes to money
and politics and you get a different administration and they

(01:43):
may change their mind on that and they weren't responsible
and lawsuits will fly. So I don't know, because the
custodians are being very, very slow and moving on this,
and I'm thankful for that. That would be there out,
that would be the private equity out when you know,
the bubble would an essence burst with the usual suspects

(02:05):
the general public. The greater fools that buy into this
nonsense are the ones that get hurt. Another scenario is
as well, could be well, you know, some sort of
public bailout in some way shape, matter of form. I
don't know. People are starting to notice, though they are.
The numbers are out in regards to the performance of

(02:29):
many of these funds, and it's not good. It's not good,
especially in compared to how the markets are doing overall.
You're starting to see the private equity bros out there
defending what they do and you don't understand how it works. Yeah,
I do understand how it works. It was interesting the

(02:53):
fact that there are one of the nineteen thousand private
equity companies in this country and what is it like,
fifteen thousand McDonald's. And we got to get your arms
around that number. Nineteen thousand private equity, fifteen thousand McDonalds
are in the car. How is this all going to

(03:13):
work out? The entire industry and of itself? Okay? Again,
born out of cheap money, Born out of cheap money.
Where many of these again, when it started, a lot
of smart guys like, oh boy, look at look at
all this cheap capital. We can get at these very

(03:35):
very low rates. We borrow this money and we start
looking at various different companies that we can buy. Okay,
nothing wrong with that. Okay, nothing wrong with that. What
happened a lot of people that really don't know what
the hell they're doing. Again, I kind of saw this

(03:58):
stuff coming watching all these kids graduating from colin I
want to be in private equity. I want to be
in private equity. I'm in private equity, and all of
them getting these jobs and they don't know their butt
from a hole in the ground when it comes to business.
Oh yeah, they got their fancy degree, they never worked
in a business in their entire lives, and they're all
of a sudden, they're they're going out on buying spreeze,

(04:20):
going out on buying spreeze, buying this that company, next thing,
and paying ridiculous multiples. Price matters, price matters. They don't care.
They ain't care. Again, many of them have been't even
have you know, ask mommy and Daddy for the capital

(04:40):
to put into the private equity comes they could be
a partner in it, or they borrowed money. That's another
issue in of itself right now because a lot of
those loans are coming due and they're not getting the bonuses,
and they're not seeing the performance, and there's no out.
There's no out out. That's one of the things most

(05:03):
people fail to understand when it comes to financial markets.
There's two sides to the equation. Two sides equation. Many
people today they think a stock and invest whatever it
may be. It's it's a casino chip that you cash in.
It's not someone has to buy, meaning someone has to sell,

(05:25):
someone sells, someone has to buy. There's two sides of
this equation of the transaction. In order for it to
take place. Who's buying right now? Who's buying these private
equity companies that were bought by them at absolutely ridiculous
multiples that make no sense whatsoever. I pointed out, you know,

(05:48):
the all the HVAC companies that were bought up at
crazy levels, who's buying them at a higher price. Again,
it goes back to the old game that I like
to talk about, demonic game of musical chairs. And they

(06:09):
need to find a greater fool to do this. He's
talking with friend of mine last week, right guy consultant
on all sorts of texts, tell me about how his
his the guy who did his gutters, took the leaves
out of his gutters, called them up, call him up

(06:31):
to take the leaves out of his gutters. And he's like, ah, yeah,
I sold my business. This is a guy he didn't
even take credit cards, pride this. He just took cash.
He had like five hundred clients got bought out. He said,
you won't believe the price they paid for this thing. Now, okay,
you got all the private ECHA. They're gonna they're gonna,

(06:52):
you know, streamline this and they're gonna make an app
out of it. Now you're gonna pay online and the
fees are gonna go up again? What is that company
really worth? One of the things that I feel we're
having to be pretty good at Markowski Investments is valuations
and understanding valuations. It's partly I always use myself as

(07:18):
an example, this evaluation of my own company. And I
check my emails in the morning every single day. How
many emails do I get from various different private equity
companies looking to buy us? Oh yeah, we're going to
be at this problem. Fly in comestay, we want to

(07:38):
talk to you about buying Markowski Investments. I don't talk
to these people. When I first started getting them, I
was curious, and then they start, you know, throwing around multiples.
I'm like, I know what my company is worth. I do.
I don't try to kid myself. We're a unique company,

(08:02):
and you know we're growing and God willing that continues.
Radio all the things that we've got going on, and
I know it separates us. But I know that my
company is not worth a ten multiple, twelve multiple. I
know that, but that's what they're willing to pay. So

(08:23):
to me, what they're going to do is they're going
to buy my company, stick it into their portfolio. Oh,
look at this, it's it's cash flow positive. And then
they're going to turn around and say that it's worth
fifteen times or eighteen times, and then they're going to
start charging the people that have invested in that fund

(08:45):
two percent of assets plus what you know, twenty percent
of whatever it makes. At what point in time, who
marks this thing to market? They make They're coming up
with their own marks. They're deciding themselves what this thing
is worth. I've explained this to people again and again
and again. You can tell me what something's worth. Something

(09:05):
is worth what somebody else is willing to pay for it. Okay,
you're willing to pay for it at that certain time,
trying to find somebody else. The multiples that they're paying
on everything from gutter companies to HVACX to veterinary clinics
to registered investment advisors on through they don't make any

(09:26):
sense at all at all. And you have a massive
amount of incompetent boobs running these things, and they're at
a point in time where they don't know what to do.
They don't know what to do, more than likely in

(09:51):
order to keep going, in order to maybe get some
of their investors out that have been in for a
decade and still you know, I haven't seen return that
They're gonna probably see them start borrowing money. I'm gonna
see how that is gonna fly. But they're probably gonna
have to start borrowing money to pay people. And again
it's gonna cause a whole another range of problems that

(10:16):
are out there. Again, there are some groups that that
actually do a good job, do a good job, but
again most of them horrific, horrific. And again you can
take a look yourself. You can take a look at

(10:36):
the you know, the performance of these funds. They got
nowhere to go right now. Again, unless they're able to
rip off the American people by con getting their investors out,
by putting these things into four one ks. Again, what's next,

(11:01):
what's next? Lawsuits? You're going to have to sell these
businesses off at also, and again I would have no
problem with that. Again, let things, let things find in equilibrium,
that's what they're supposed to do. We talk about that
when it goes back to Benjamin Graham, and you know,
intrinsic value. Sometimes things are well above their intrinsic value.

(11:24):
That's when you don't want to buy, you want to
buy when it's below and if there's a big washout, hey,
guess what, we'll have a lot of really great businesses
out there that we'll able to be bought at a
much better price. Pricing is always important. You don't have
to chase nonsense at multiples that make no sense whatsoever.

(11:50):
And that's what's been taking place for the past ten
plus years with private equity watchdog on Wall Street dot Com.