NEW YORK (Reuters) - The heavy pace of private equity deals being brokered on Wall Street is not a bubble being driven by irrational investors, but rather the result of an arbitrage opportunity in the market, said Citigroup’s chief U.S. equity strategist.
“Everybody talks about the private equity bubble -- remove it from your lexicon,” said Tobias Levkovich at the Reuters Investment Outlook Summit in New York. “That’s human beings rationalizing something, that’s not structural.”
The structural issue at work encouraging the deal-making is that cash flow yields are markedly above junk bond yields, similar to the environment during the late ‘80s when the market in junk bonds flourished.
Private equity deals will likely continue to be made until something happens to disturb that gap, such as junk bond yield spreads widening or interest rates moving up, Levkovich said.
“But we’d almost need 300 basis points for that to happen, or a 15 to 20 percent rally in the stock market or a 30 percent drop in cash flow, all things being equal,” Levkovich said.