Some of the biggest and most sophisticated private equity and hedge fund investors in the world are stepping back from equities and bond markets.
At a pair of morning panels at the Milken Institute Global Conference, fund managers including Joshua Harris, the co-founder and chief investment officer of Apollo Global Management; Wilbur Ross of WL Ross & Co.; and Apollo chief Leon Black warned that central bank policies around the globe had set stock and bond prices soaring too high.
Investors should "run—do not walk" from bonds at current prices, Harris said.
"There's a tremendous amount of interest rate refinancing risk being built up," Ross said. "We're just building a bigger and bigger time bomb."
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Ross added that the real danger will come when the debt that companies have issued at very low rates must be refinanced when central banks have pulled back on monetary accommodation. Between 2018 and 2020, "a wall of maturities" will require refinancing of $500 billion of low-rated debt, he said.
"This is the creation of the next distressed debt cycle," Harris said.
Harris and Ross agreed that this isn't the time to buy bonds or stocks, except in some pockets of the market where prices might be depressed.
"We're seeing overvaluation in all traditional asset classes," Harris said.
"Sometimes it is better to hide," Ross added.
Black, who runs the private equity giant Apollo, said he believes this is a "fabulous environment," as long as you're selling.
"Over the last 15 months we've been a net seller," Black said. "We're selling everything in our portfolio that's not nailed down, and if it is nailed down, we're refinancing it. It's almost biblical. There's a time to reap and a time to sow. We're harvesting."
Black said he expected credit and equity markets to keep rising as Federal Reserve policy holds interest rates very low. In that environment, he said, his company will "continue to harvest rather than invest."
The concern about equity prices explains why, despite the availability of relatively cheap money, there has been so little merger activity this year.
According to Jonathan Sokoloff, a managing director at Leonard Green & Partners who spoke on the same panel as Black, the transaction volume has fallen dramatically since last year.
"Now is the time to be cautious," Sokoloff said.
He didn't say his firm was selling but said it's definitely taking up the second part of Black's formula: refinancing at current low rates.
"We've dividend recapped and refied just about everything we can," he said.
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