KKR's McVey Says Markets Are Not Overvalued

Bloomberg

18-07-2025

CC-Transcript
00:00You say markets are reasonably valued and not overvalued. What's the difference between the two? So I think what we've seen over the years is that the quality of the S & P has actually improved. Right. You cut taxes, corporate taxes went from 31 to 21. So there's more free cash flow. The second is, is that the index has moved to be more towards services companies that have a higher return on capital and they have higher margins. So I think what we've seen this whole rally has been fought for. If you go back, we were up 55% in the last two and a half years and generally there's been a lot of noise out there and so people have not gotten fully invested. Our view is, is that the cycle will go on. This is like the nineties in the sixties where you have a productivity driven cycle. They last longer. 2022 was like 1994 where the bond market sold off. People moved to the sidelines. You really wanted to buy that in 1995 and it ran for another five years. We think that's very similar productivity driven cycles. They just act differently, right? Most people would say ISM has been below 50 for 26 out of 27 months and we haven't had a recession. There's something different going on and we've seen this one or two other decades. We own 200 companies around the world. We've got lots of different data points on how corporates are functioning. And when COVID hit, what they did is they really focus on automation and digitalisation. We talked about this a little bit before and that spending is yielding really good results. I don't actually think we've had the AI boom. Our flow through the data yet. And so that's, you know, I think you have to keep that in check. But I think that could be a little more addition to this productivity, productivity driven cycle that we've seen. It's largely in the US. I mean, I travel around the world, we've got 24 offices, but most CEOs today are need for competitive reasons to invest in technology, and they're squeezing more out of their out of their business in their cash flow. If you have this huge investment boom, you have a huge technology cycle and you have consumers that are hanging in there. We just saw that with retail sales. What gives you confidence that inflation's going to come down enough over the long term to lead to a global easing cycle? Yeah, so this is a great question. My actually view we've been talking about it. Take care of this higher resting heart rate for inflation this time. I actually the Fed has told us they're going to miss their mandate for seven years in a row. I bet they're very few of your your viewers actually were investing when they missed it seven years in a row. So I actually don't think in the US it's going to come down. What's different? The global easing cycle. We track the top 25 central banks around the world and what they're doing in 2022, 84% of them were raising rates. Today, only eight are said they're starting to ease. This cycle was actually led by the ECB. It's the first time we actually had the ECB out in front of the Fed. So I think inflation will stay stickier here than in other places of the world. But you have to look at it on a global basis. And one other point I would say is, is that when I started doing financial services and macro, the Fed's balance sheet was about 6% of GDP, then it went to 34% during COVID. And and then it's back down to 22 to 24%. That's still a huge number. That's that's a multiple of four versus nor normal. And that money is sitting on the sidelines. And it is particularly in the insurance arena, that money needs to get invested to make the the retirees actually achieve their returns. So the credit markets this cycle, you have less bank deleveraging, you've got higher quality, high yield, and then you've got this kind of tsunami of money that needs to get invested. One of the things that I love about our platform is we can look across relative value, across the capital structure and and what you see, it changes by day in terms of where there's value in credit. But overall, it's behaved incredibly much more benign this cycle than in the prior cycle. And the higher yields have led a lot of people to say this is the golden era for credit, particularly private credit, and moving away from private equity. Yeah, and we've seen some real concern about exits not coming to the fore and now universities selling some of their holdings for liquidity. Why do you push back against the idea that this really could lead to some sort of material weakening in the base of your original business? Yeah. So what I would say is one of the reasons in 20 1627, KKR probably over deployed a little bit. You have to have linear pacing when you do private equity. This in 21, 22 and 23, we did kind of a quarter or quarter or a quarter of the fund. That's the way you never have to make a big bet. What the industry did is it probably in general over invested in 21 and early 22, so they're gonna have to work that out. So I do think we've we've led to some differentiated outcomes, I think for the industry that what you're starting to see right now as monetizations pick up a little bit, the IPO markets opening over time and you've seen this real shift in our focus. This is a world where you're going to make more private equity, kind of make your own luck through operational improvement, corporate carve outs, public to privates. I think there'll be less that vintage. Where many in private equity were going private to private investments. I don't think those deals will perform as well. We certainly one of the reasons I have a job is we had made that mistake in 2006 and seven. And I think the industry will catch up to where we are after this latest later cycle. So I'm not as for overall, I knowledge there was over deployment for the industry in 21 and 22. I don't think we're suffering from that. And in general, what I would say is that over time when you if you're a long term investor, private equity has delivered about 4 to 500 basis points better than than most public equity markets. We just have about a minute. America versus Europe. Which do you prefer? And it's because you don't believe in American exceptionalism. I think actually, I think that what we're seeing in both regions is are they're going to perform, you guys has today has better companies. What the sentiment coming out of Davos was so negative on Europe. If they just did anything positive that you guys reported on this, anything went well, they delivered. Interestingly, Europe has actually been one of our best performing regions, a lot of really good entrepreneurs, a lot of a lot of stuff in infrastructure. Well done. Well, but keeping its but I think where you should watch I think defense stocks and do well there I think that financial services are going to do well and watch some of the smaller tech companies. But over time it's all about productivity. We've been saying that for years. Continue to focus on that. Happy to come back and beat the drum on that. So happy Friday to you all.
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