"We can’t ignore deficit spending forever" – Q&A with Investcorp's Dave Tayeh
The latest addition to PEWire's 'New Normal' Q&A series features Dave Tayeh (pictured), head of private equity, North America, at Investcorp. Tayeh is a member of Investcorp’s Operating Committee and serves on its Investment Committee and the Financial and Risk Management Committee.
In this interview Tayeh shares his views on the current deal environment, the role of the private equity industry in the recovery as well as its timeline, how the low interest rates are affecting company valuations at the moment, and how the large amounts of dry powder might be used in the years to come.
What's your outlook on the current deal environment, and what are your expectations for 2021?
The outlook is quite positive. Deal activity has rebounded from the onset of Covid. The fourth quarter was very robust; and it’s been supported by both the macro recovery, with tangible optimism driven by vaccines in particular and the continued availability of capital – both from the debt and private equity side. Valuations are still high and there is a bit of bifurcation. People are paying up, and are willing to pay for quality. There’s still a meaningful recovery to go in the US and there are certainly segments that have not rebounded, depending on where they are in terms of sector.
What’s the role of the private equity industry in the recovery?
We have an obligation to our investors to provide both good stewardship and appropriate returns. We also have an obligation to our employees, and when the shutdown happened last year, our first priority was the health and safety of the employees in [our portfolio] companies. We made sure that we did everything we could in terms of PPE, the right protocols, and providing resources for anybody needing them.
We had an individual agreement with each of our companies to protect and preserve as many jobs as possible and actually hired. Since we don’t highly lever every company, as we want the flexibility to grow, an unexpected situation like Covid still allowed us to hire.
What do you predict in terms of the timeline of the recovery?
Overall, I’d say the recovery will continue at pace. Liquidity has been a very significant support to the system, but the stimulus has also been very important, and we’ll see what happens on the pending infrastructure bill as well. We’ll have a very strong GDP in the US this year – a bit less so in Europe. The general consensus is that it’ll continue into 2022 or 2023, and based on what we see in our portfolio, that’s consistent with the performance.
We can’t ignore deficit spending forever, at some point, we have to be balanced in how we pay for it. There’s still a lot of people who have not been able to get back to work and the excessive unemployment benefits won’t last forever so we need to solve that.
How is the low interest rate environment affecting valuations at the moment?
It’s certainly had an impact. If you look at market data, valuations have picked up again. They are higher today than they were a year ago, not only in public markets, but in private markets too. That’s partly what’s driving the increased focus on quality as well. If you’re going to pay a premium price, which you might be able to mathematically justify by the low interest rates, you also need to consider: will we face multiple compressions at some point?
If you do, you want to own a business that you believe will continue to grow over a long period of time. The higher quality companies will be more insulated, and they will be able to grow faster and create more value.
Do you think we’ll see more investments into co-working office spaces?
On a macro level, yes. I think you’ll see more flex space, or less space in some cases, so I do think it’s interesting. But you then need to do the work on the individual company, does their business model make sense and what’s the differentiation?
How will the large amounts of dry powder be used in the years to come?
There’s a tremendous amount of dry powder given the performance of the asset class over a long period of time. So that’s a positive for the industry in that sense. More and more capital runs the risk of pushing down future returns, however.