"That's The Greatest Risk" - Head Of World's Largest PE Firm Warns Of "Asset Bubble Reckoning"

It's not just corporate insiders of publicly traded companies who are dumping stocks at a feverish pace: private equity also would be... if of course the equity wasn't "private." Stephen Schwarzman, the CEO of Blackstone - the world's largest private equity firm - warned Monday that the inflating bubble in asset values "could lead to a painful reckoning, particularly for late-stage investors in private technology companies like WeWork parent We Co."

Speaking to the WSJ, Schwarzman said that orivate valuations are getting "very high", adding that later-stage funding rounds in companies planning initial public offerings were helping to escalate those values, even for companies that often have little prospect of profitability. Case in point: WeWork, whose disastrous IPO, and whose valuation collapse from $47 billion to less than $10 billion, coupled with mass layoffs, demonstrates what happens when there are no more greater fool.

"That's the greatest risk," Schwarzman said in response to a question about patterns he sees developing in the market.  "These valuations of private tech companies are most probably too high," he said, adding some people will lose money as a result.

Schwarzman listed SoftBank's catastrophic investments We and Uber Technologies as examples of overly high valuations, and likened the situation to the dot-com bubble around the turn of the century.

Then again, the bad blood between VCs cashing out from overvalued investments, and PE firms trying to buy (or sell) companies at a time of record high EBITDA multiples is hardly new.

Alternatively, VCs will be happy to counter that whereas their investment create jobs, PE portfolio names merely saddle firms with massive debt loads, forcing them to fire millions of workers as they cut into both the fat and muscle, and strip their investments to the bone. Blackstone however, would have none of it: asked about the battering the private-equity industry has been taking this year by politicians in Washington, D.C., and on the presidential campaign trail, Schwarzman said much of the criticism doesn't reflect facts.

Arguing that buyout firms "typically invest to grow portfolio companies and improve profitability", which results in increased payrolls rather than job cuts, Schwarzman pointed out that Blackstone portfolio companies created about 100,000 jobs over the past decade. Of course, here one can point out there some of the biggest defaults in the past two decade have been the mega LBOs which, due to record debt loads, ended up in Chapter 11 or Chapter 7, firing most of their workers, but not before the PE sponsors made out like bandits on their investment.

He added that Blackstone buys an asset to "make it better so it can make more money and grow faster," he said. "To make a company grow quickly, you don't cut your way forward. You have to invest."

Ironically, in a time of collapsing CapEx and massive buybacks and dividends debt deals, nobody is actually investing and everyone is "cutting" their way forward.

Defending his track record, Schwarzman also pointed to the contribution private-equity firms have made to the U.S. retirement system, through managing investments from institutional investors such as pension funds and life insurers. In all, he said, the industry has invested about $3 trillion over the past five years.

It remains to be seen what the IRR on those $3 trillion will be after the coming market crash.