Friday Letter Take me back to the 1940s

Team PERE was not around at the time, but apparently, in 1941, the US Treasury told the Federal Reserve to finance World War II.

In response, the Fed made sure that long-term bond yields stayed below 2.5 percent through action we nowadays call quantitative easing. It did so by standing by ready to buy bonds whenever the yields threatened to dip below a certain point and by keeping short-term interest rates close to zero. There was an incentive for banks to buy these bonds and effectively have them financed by the Fed. If this sounds at all familiar (apart from the war aspect), then that is exactly the point.

At the PERE Global Investor Forum in Amsterdam yesterday, Joachim Fels, chief global economist at Morgan Stanley, said 2012 bears striking similarities to the 1940s and 1950s in the economic sense. When the war ended in 1945, he pointed out, the Fed kept long-term interest rates extremely low, even though CPI inflation spiked something like 20 percent. For a good few years thereafter, inflation continued to be high, and the US government got out of its high debt-to-GDP ratio after World War II by “pumping up” nominal GDP through higher inflation and holding government borrowing costs down.

“I think that is a strategy we are witnessing again,” Fels said in an impressively wide-ranging keynote speech.

He went on to talk about the global economic outlook, discussing the likely shape of the interest rate environment going forward and also the future of Europe. Long-term Fels is an optimist, although he is pessimistic for the region in the short term.

Against this backdrop of a challenging macro picture, what is striking is how those in private equity real estate just seem to be getting on with business. In Amsterdam, we spoke to a London-based fund manager about to go back out on the fundraising trail after investing about £1 billion in a debt strategy. We ran into a placement agent excited about a mandate soon to be signed with a blue-chip US firm. And we caught up with a US fund manager, which is striking yet another opportunistic deal in Europe and spoke excitedly about Ireland.

There was an Asia manager with a tightly focused China strategy closing in on fresh LP commitments; a Dutch investor asking what was wrong with development as a sensible real estate play; another fund manager getting excited about debt investments in the US; and a secondaries buyer looking at three chunky portfolios. We could go on.

To be sure: nobody at the conference seemed blind to the difficulties posted by the big picture. As conference chairman Robert Weaver, a partner at TPG Capital, said in his introductory remarks: “What’s really important in the next 12 to 24 months is the macro. You can get the micro right, but if the macro is wrong, it doesn’t work.”

But again, even if you whole-heartedly agree that macro sets the tone for everything else, there is no escaping the fact that present-day practitioners are seeing good opportunities at the micro level, too. The 1940s is widely remembered as a dark period in human history. But if, from an investor perspective, it was anything like today, then it can’t have been all bad. Investing at times of great adversity has always delivered some exciting outcomes.