TPG'S Bonderman Predicts `L-Shape' Global Recession

``What happens in the next leg down? We obviously have a huge crisis in financial institutions, but the crisis in the economy is just beginning to be felt,'' Bonderman told a private equity conference in Hong Kong today. ``The global recession is likely to be a deep one and a prolonged one, not a V-shape, not a U-shape, more an L-shape one.''

 

The credit contagion that began with a surge in subprime mortgage delinquencies is driving the U.S., European and Japanese economies toward recession, and prompted China to unveil a $586 billion stimulus package. The International Monetary Fund last week predicted economic contractions next year in the U.S., Japan and the euro region, the first simultaneous recession since the end of World War II.

 

David Rubenstein, the 59-year-old co-founder of Washington- based Carlyle Group, echoed Bonderman's pessimism. Rubenstein said at the Hong Kong conference that the recession will last for at least a year, and that U.S. unemployment may rise as high as 10 percent. The jobless rate climbed to a 14-year high of 6.5 percent in October.

 

``The U.S. economy is just not going to be the engine of the world,'' Rubenstein said.

 

 

U.S. housing prices may have ``a significant way'' to fall because they're still high by historical standards and sliding rents are reducing the allure of home ownership, said Bonderman, whose firm's funds oversee more than $50 billion.

 

Home prices in 20 U.S. metropolitan areas slid 17 percent in August from a year earlier as foreclosures rose, according to the S&P/Case-Shiller price index.

 

TPG, formerly known as Texas Pacific Group, has made investments in distressed companies including Continental Airlines Inc. The firm joined with KKR & Co. LP last year to acquire electricity producer TXU Corp. for $43 billion including debt, the largest U.S. leveraged buyout.

 

TPG's fourth buyout fund, launched in 2003, has delivered average annual returns of 31 percent, according to the California Public Employees' Retirement System, an investor in a number of TPG's funds.

 

 

While Asia will ``not be immune'' to the global slowdown, its economies will fare relatively better, said Bonderman. The region is home to China, the world's fastest-growing major economy, and banks have so far evaded the worst of writedowns and credit losses that have reached $704 billion worldwide.

 

Bonderman, 65, also offered a bleaker outlook for the buyout industry than did Blackstone Group LP Chairman Stephen Schwarzman two days ago. Uncertainty in financial markets means transactions will dry up, he said.

 

``In extremely unstable markets there are usually no sellers, unless they are forced sellers, and no buyers,'' he said.

 

Schwarzman, speaking Nov. 11 at an investment conference in New York, said he's ``optimistic'' about the fund's prospects and that a global recession isn't necessarily bad news for leveraged buyouts.

 

``Over the next 12 months, there isn't going to be really any credit to do much in the way of private equity,'' KKR co- founder George Roberts told the same conference. ``Fast forward to another 18 months from now and you will start to see the credit markets come back.''

 

KKR is this year expected to post only the second year of losses on its investments in its 32 year history, after the 1990 to 1991 period, Roberts said.

 

 

Yet investors will be able to find good opportunities as bank borrowing dries up. For example, buying senior loans at cash-strapped firms may be a lucrative business, said Roberts.

 

U.S. government rescues of financial firms such as American International Group Inc. will also allow private equity firms, the only investors with an estimated $500 billion to $600 billion in cash, to buy assets, Roberts said.

 

Even if they will not be able to buy control, they will ``have a lot of bargaining power in today's environment,'' to negotiate the rights they need, he said.