Goldman Sachs Signals End of Era, Hires Ex-Honeywell CEO

Bloomberg Sri Nanarajan has been reporting on this story and he joins us now. Corporate muscle, huh? What is that? Who? Well, for one, they're bringing in the former chief executive officer of Honeywell, Darius Adam. Check. The reason it's interesting, especially at a place like Goldman Sachs where you're used to them scooping up high profile advisors. But even there, when you have the CEO of a former CEO of a sprawling industrial conglomerate come in, that tells you what they're focused on. And what they say they're focused on is this new reckoning for private equity. Gone are the days when you can just bid at the auction, buy a company, sit back, watch the games roll in and sell at a higher multiple. That's not likely to happen in this new normal of higher rates. That's what everyone's worried about. That is not cheap anymore. So you can kiss goodbye to cheap financing multiples expansion is not happening the way you used to. So there is a lid on valuations as crimped deal making. And if private equity funds cannot offload their portfolio companies, then how do you continue the cycle? Because this industry relies on funds buying companies watching their value go up, selling those companies that are gained, returning the capital to investors and those investors pouring that money back into new funds. Anything in that process breaks down, then it causes nervousness across the system. A lot of the people in this industry were at this fancy conference in Germany very recently where they had rappers like Fat Boy Slim performing. But the real concern behind the scenes is what happens when the music stops, and that's what they're contending with right now. It's Fat Boy Slums, a rapper. That's what I was told. OK, that's news to me and then the news to most rappers out there. It must have been a fancy conference, though, if he got invited. I am curious, so about this idea of sort of what an Adamsic hire really means because you talk about the breakdown of that typical private equity process here. Is this about fixing up these companies in a way so that they can exit? Or is this kind of a sign that they're going to be holding on this stuff for a lot longer, so they need to make sure that there's some cash generation in the interim? There's some interesting statistics floating around, and there's been some research done over the last, you know, let's say roughly 2 decades. Yeah. How have returns been generated at private equity firms? Like when they make their investments and then exit them, Where are the returns coming from? Yeah, a fraction of it. It's less than 10% has been driven by profit growth at these companies. A lot of it has been driven by leverage and other financial hijinks. If that component is disappearing and you still hope to be part of a process where you're buying a company and look to sell it at a higher value, then you're going back to the very basics. In some ways that was the stated ideal of this industry when it started off 4050 years ago. When it really took off was we will find companies that require fixing, which have been under invested where management hasn't been great. We are the experts will come in and fix it. But it's saying let's do that again, OK, right. But you just can't do that by just like firing a bunch of people, cutting costs and then hoping for the best. You also want the company to last last beyond day after tomorrow. So that's not always a simple solution. So this bodes very poorly for the private equity world, right? I mean, it doesn't that make it seem like we're setting us up for real issues? Yes and no. OK. Because those who are the practitioners, the top end of this field will tell you in the last 15 years, the problem was anyone could hang up a shingle saying I'm a private equity firm, build up war chess and see higher returns going forward. Now they're saying there will be dispersion because returns in the next 10 years will not look like the last 10 years. And dispersion usually means that those people are confident in what they do and then think they have a good offering and a good product. They'll say we'll actually stand out Because in some ways you might say, why are senior executives at Goldman Sachs and Apollo talking about the challenge facing the industry right now? That doesn't seem like the greatest pitch. What they're actually doing is sharpening their pitch to these so-called limited partners. They're investors and telling them, look, there is a challenge. Some of us will be able to navigate this better than others because this is what we're doing. And that's why you need to suss out who are the good actors out there and who are not. And to be fair, LP's have been doing this work. They have been analyzing deals over the last 10-15 years and seeing where that earnings growth, where that returns have been driven by has it truly been just financial engineering and multiples expansion or they have they actually done good stuff for the company. The people who've been able to do good with the company stand to benefit in a more difficult and a more challenged environment.