Research & Commentary

Deflation of Private Equity Bubble

The private equity sector has enjoyed the best conditions in its history. That fits with an epic top.

Back in May, Carlyle Group LP co-founder David Rubenstein said, “it’s easier to raise money than at anytime I have been in the business over the past 30 years or so.” Billionaire Rubenstein has a talk-show where his guests regularly include other billionaires from the private equity sector. So flush is the sector that a common complaint over the past couple of years is that firms have too much capital to know what to do with. There’s too much money and not enough deals. Nevertheless, that hasn’t stopped some firms from trying to gobble up as much as possible. Blackstone recently announced that, having seen its assets grow from $400 thousand in 1985 to $439 billion today – a one-million-fold increase (let that sink in) -, it is shooting for $1 trillion in the next eight or more years (big deal, that’s two-fold, aka chump change!).

The bubble in private equity has been fueled by the excess liquidity and credit created as a result of the extraordinary period of monetary policy known as Quantitative Easing (QE). However, the inflation of the money supply brought about by QE inevitably leads to its subsequent deflation. Ironically, it has been the positive trend in social mood over the past nine years that has given the authorities the confidence to start taking away liquidity, aka Quantitative Tightening (QT),  just at the time when mood is turning negative. Indeed, Elliott Wave analysis of private equity shares leads to the conclusion that the cycle is near a peak.

Our chart shows the share price of private equity leader Blackstone Group. The wave structure counts well as nearing the completion of an advance in five Primary degree waves since 2009. What we find particularly interesting is that the fifth wave (circled) is shallower than the third, as fifth waves often are when momentum starts fading from the trend. Also, this fifth wave is so weak that it may not even have the strength to make it past the end of wave 3 (circled) — a truncated fifth, which often occurs after a particularly strong third. Finally, note that the final movement of the Primary fifth wave looks to be developing as an ending diagonal. That’s a clue pointing to the probability of a very sharp initial decline when Blackstone turns down. Coupled with the ending diagonal, it’s about as bearish a profile as one can get.

According to this analysis, the private equity bubble is about to burst.

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