Leon Cooperman Warns Private Equity Is a Risky Bet Fueled by Low Interest Rates

(Bloomberg) -- Legendary hedge fund manager Leon Cooperman took a shot at the private equity industry, saying low interest rates that have fueled its returns won’t last.

“I think it’s a scam personally,” Cooperman said Wednesday at an event hosted by the New York Alternative Investment Roundtable. With interest rates likely to rise over the next few years, the “timing is wrong.”

Cooperman said declining rates are the main reason that leveraged buyouts have generated high exit multiples in the last decade. He said private equity deals have also benefited from a growing economy that may be losing steam, while competition among buyout firms is on the rise. Later, he further elaborated on his comments, saying that while the industry isn’t an actual scam, the high fees and lengthy lock-ups don’t appeal to him.

“If you do private equity in small or mid-cap companies, not the big stuff, I can understand it, you may have a certain edge,” he said. But there’s no question, he added, that the returns on “the large deals have been aided and abetted by the enormous decline in interest rates.” The odds are very high that rates will be going up over the next five to 10 years, he said.

The private equity industry has been in the midst of a fundraising boom while many hedge funds have struggled to raise capital because of lackluster returns. Cooperman, 76, retired from managing client money last year and converted his Omega Advisors into a family office. Omega, which posted annualized returns of 12.4% since inception, cashed investors out at an all-time high.

Heavy Debt

Cooperman said Wednesday that the market is fairly valued, and that he was surprised by how abruptly the economy stalled in the fourth quarter “in the face of a very small interest rate increase.” It “tells me there’s far too much debt for the system, and it’s getting worse.”

If there is an asset bubble, it’s in fixed-income rather than equities, he added. He sees very few signs of euphoria in the stock market today other than in initial public offerings.

The Bronx, New York native founded Omega in 1991 after 25 years at Goldman Sachs Group Inc. The fund faced a tough patch when the Securities and Exchange Commission accused Cooperman and the firm of insider trading relating to Atlas Pipeline Partners in 2010. The firm settled in May 2017. After the settlement, Cooperman lambasted U.S. regulators as “abusive,” saying he would have won at trial but would have faced far higher legal costs.

--With assistance from Katherine Burton.

To contact the reporter on this story: Katia Porzecanski in New York at kporzecansk1@bloomberg.net

To contact the editors responsible for this story: Alan Mirabella at amirabella@bloomberg.net, Vincent Bielski, Josh Friedman

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