lisa: i'm lisa abramowicz. welcome to bloomberg's "money undercover." we take you inside the world of private debt, equity, and real estate. let's get straight to the burning issues in private markets. fear seems to be keeping greed in check as private equity prefers cash to deals. developers treading water as they take out loans to avoid fire sales of their properties. lifestyles of the rich and famous. we look at what super yacht sales are saying about sentiment among the world's wealthiest.

let's get into some of the burning issues. with me today are sonali basak, adam tempkin, and natalie wong. the total value of u.s. buyouts has fallen 25% through october compared to the year last year. why are private equity firms not putting more of their cash to work? sonali: one reason you can think of is valuation. morgan stanley has pinned the first half of the year as the highest since 2000. equity valuations are high but leverage levels are also high. one way that private equity firms make a return is by delevering the companies they invest in. lisa: are we expecting to see a pickup in a number of lbo's next year? sonali: people are waiting for valuation to come down a little bit. only so long you can hold onto cash. everybody is looking at warren buffett, wanting him to spend more. until that happens, until people get comfortable with the debt markets, you'll not see it come back. lisa: even warren buffett tried

to bid on a deal but got outbid by a private equity firm. he said, i don't feel comfortable at these valuations. sonali: apollo ended up buying the company, tech data. you are seeing people dive in because you cannot hold onto cash forever. at the same time, remember, kkr had a rumor about walgreens, a huge buyout. still a rumor. we will see if the big deals start coming back. lisa: one impediment standing in the way of more leveraged buyouts has been valuation, particularly of loans, which has not been as high. what have we seen in particular with collateralized loan obligations, considering they are the main buyers of the leveraged buyout debt? adam: returns have been lackluster across the board, especially in equity. nomura set the lowest range since 2013. the lowest since 2013. why? wide spreads, less economical to

put the deals together. lisa: the way this works, the pool of leveraged loans is traunched out in various levels, and even the top level investment-grade ratings earned way less than bonds. why has there been lackluster demand for this vehicle? adam: spreads across the board this year have been wide and stagnant. you have a fundamental problems in the underlying leverage loans. there have been increased loan downgrades. we are worrying about all of these ccc's in clo's, price drops. higher percentage trading less than $90, less than 80, more distressed loans. and you have idiosyncratic risks in some of these loans, health care loans, because of regulation. all of this means weakening, constrained arbitrage. lisa: 2020 expectations, do people expect the market to rebound for clo's? adam: much lower. this year we are at 110.

last year was a record of 130. guess what, next year, they are saying $80 million to $90 billion. a bear case could be $60 billion. lisa: thank you. that all leads us to natalie, weakness we been seeing in the housing market. at least in certain pockets, particularly coastal cities. i wonder from your perspective, what are we seeing out of condominium developers in particular in order to survive? natalie: especially in cities like new york, where the condo market has taken a hit in recent years, they are starting to take out loans. condo inventory loans are used to help carry the cost of unsold units in a slow market. we are seeing them into this market to try to get more loans while they keep their projects afloat. lisa: how long will it take for the glut of supply to work its way out, in order to get a more normalized level of supply versus demand of these condos?

natalie: it is hard to tell because the market is already struggling under legislation, potential taxes, a slowdown of foreign buyers coming in. at the same time, we have thousands more units coming into the market over the next few years. we are not really seeing the shift in buyer demand because a lot of times, the prices are still very high and a lot of the developers are not yet adjusting their pricing to match the market demand. lisa: if we didn't see this type of lending to developers in order to not sell their condominiums quickly, would we see prices plunge much more than we have seen? natalie: hard to tell. in some areas, we have already seen prices plunge. you look at billionaires row where there is a huge concentration of ultra luxury condos. contracts in that area have already dropped 90% in the second quarter compared to the year earlier. we are already starting to see some of the price adjustment. lisa: thank you to all of our reporters. that brings us to the real

estate roundup. jonathan miller is with us. he has been surveying the landscape of real estate for years and years. can you give us a sense of just how pronounced the weakness is that we have seen in certain coastal cities when it comes to the high-end? jonathan: you look at a market that is weakest at the top, tighter as you move lower in price. in real estate we tend to say everything is the same but we have a significant oversupply in the high cost, high tax markets in california, new york specifically. lisa: what is the range we are talking about? in price. jonathan: the top end of the market in new york, top 8%, starts at $5 million. in california, it's about half that. both markets are seeing a significant slowdown in activity simply because buyers are there, but sellers are anchored to tax conditions.

lisa: let's talk about these loans that developers are taking out in order to keep good on all of their debt. it is a revolving door of money -- in order have to sell their condominiums at fire sale prices. is this going to work? jonathan: up to a certain point, but you cannot delay the inevitable. i do think we have a lot of correction ahead of us at the high-end of the market. we have seen specifically at the high end in new york, discounts averaging about 25% off of prices that were set in 2014, 2015. we really had a correction at the very high end. middle and entry-level, we are not seeing it. lisa: how much further downside are we going to see at the high-end? jonathan: i would not be surprised if it is another 10% . we have a lot of things going on

local to new york with the mansion tax, all kinds of anti-development sentiment within the political zeitgeist that could be a real headwind for these properties to move. lisa: when, or does it trickle down to the lower and middle end of the spectrum? jonathan: you could almost say it is happening now, but a sharp drop in mortgage rates over the last year, full 1% drop, has mitigated the decline. i think the market today would generally be weaker overall if we did not have the drop in rates. lisa: is there any place when it comes to cities that are actually seeing price increases, some kind of optimism -- because we been talking about these weaknesses for a while. jonathan: what we are seeing is in low-cost or no tax states like texas and florida. south florida in particular, we are seeing activity, sales levels rise, which is in contrast to what we are seeing on the east and west coast.

those markets are benefiting from this migration from high cost to low-cost. lisa: i'm wondering how much this is being framed incorrectly, and how much cities in the u.s. are generally perhaps getting overbuilt, given the population of the u.s. is not growing that much. how does the population factor into this? jonathan: it's interesting. because we have had such low cost of capital over the last 5, 6 years post financial crisis, we have been building, but what we have been building is the wrong kind of product. we have been building to the luxury high-end, rental or purchase. we have not built the right kind of starters, starter products. what is happening across the u.s. is prices -- just like we are seeing in new york, l.a. in

particular -- prices rise for first-time buyers. it is reducing affordability because we are not adding to the housing stock, low-cost, or affordable housing. lisa: so people are going to rent forever basically? jonathan: don't say forever but the rental market is booming right now. we are seeing strong price growth in the cities that are having week luxury sales activities. lisa: this has been an area that a lot of real estate has been getting into, the rental space. thank you, jonathan miller. coming up, the power player of this week, hamilton lane's erik hirsch tells us that he is worried about an economic downturn. erik: the data is starting to tell you, caution, caution. we are getting closer. ♪

lisa: i'm lisa abramowicz. this is bloomberg's "money undercover." time for a look at some of the

most notable names in private markets. to be or not to be public, that is the question -- one that erik hirsch addressed when he sat down with me recently. fewer companies choosing to ipo. there's plenty of money on the other side in private funds keeping them afloat. take a listen to what he had to say about that and the broader private asset industry. erik: you are starting to see this tension between founder entrepreneur and investors. not everyone is on the same page of where they are driving the businesses. what is also not clear is whether those founder entrepreneurs want to be public and deal with the regulation, deal with public shareholders. at some point, you have a problem around how you ultimately get out of things that are that big without going public. lisa: there is this idea from a columbia professor about blitz scaling. some of these startups got too

much money too quickly. you agree with that? erik: you can see it in a handful of examples. there was a big run of we have to build market share and we have to do that fast. you saw a lot of capital coming in quickly. lisa: what is the consequence of that? erik: you can see the valuation for some of those unicorns and some of the tech pieces coming down. i think you are going to have to figure out with leadership, what is the exit channel? lisa: where are the pockets you are finding something? erik: we are in this interesting spot where you are getting back to basics. it is not trying to find cheap companies, because number one, if companies are cheap, they are probably cheap for a reason. there probably badly broken are not a particularly good business. where we are seeing the best opportunities are midpriced deals that you can actually make better. there are good businesses, not great businesses, but with private equity help, bringing in some of those resources, you are trying to make them into great businesses. lisa: given how much competition there is, aren't you concerned that the entry of competition is too much to deal with? erik: we are not concerned about that because the opportunity set is growing rapidly. if you look at how many private

companies there are globally, and you measure that against how many public companies there are globally, public companies are basically flat line. the private companies are still growing at a huge rate of speed. while there is a lot of capital and private equity managers, the opportunities are growing faster than capital raised. lisa: you also talk with pensions and other investors who need to put their money in and get something more for it. are you telling them to lower their returns expectations, even if they expect i would equity to -- expect private equity to outperform? erik: we don't have to tell them that, they have already lowered them. lisa: but maybe not to where they need to be? erik: maybe not. when you go around the globe, our vantage point of clients all around the world -- and we work with clients working with enormous sovereign wealth funds down to retail investors. so we are seeing the spectrum. there is not a uniform

perspective on what can i expect, what should i expect. in general, you are seeing investors take return expectations coming down. the challenge is, where are they moving, where are they going to? this has been the big driver of why private equity capital is rising. they are making the conscious decision to move out of lifted -- listed equities, to move out of listed credits, and moving to the private markets. they are doing that because, on a short-term basis, for years, long-term basis, 15 years, the private market has been a better place to be on a net-net-net basis. lisa: what will be the fastest-growing asset class? erik: credit. we are going to shift from nonperforming credit to performing credit. i think private credits are going to grow enormously. we will likely be growing around nonperforming credit.

lisa: so when will that happen? erik: the signs are starting to flash. they are not flashing red, they are orange. we are getting closer. it is hard to see a major downturn in an election cycle. obviously, the current administration will do everything they can to keep the economy going. we have to get past the election and then see what happens, to see if that market begins to fall apart. lisa: which sectors are most vulnerable when we get the downturn? erik: retail has clearly been a place -- depending on how tired -- how tied you are to the consumer and what price point you are dealing with -- you have seen that move pretty aggressively pretty quickly. who knows what kind of new regulatory environment we will be in. will health care be impacted by new regulation? will energy sectors be impacted? will financial services be impacted? that is what is most in the danger spots. technology, because most of private equity is dealing with small technology, is probably in some of the safer places. lisa: that was my conversation with erik hirsch. now you know how his firm is

preparing for a downturn. another asset manager, brookfield, recently spoke about the distress ahead. bruce flatt says the $511 billion firm is prepared. >> we have more dry powder in funds, more cash on our balance sheet. our balance sheets are more financed long-term, getting ready for the point where we can capitalize on situations, if the markets turn. if they don't, will be fine. lisa: so here is the big conundrum. you have private equity firms around the world hoarding cash, preparing for a downturn, expecting some sort of recession or at least reduction in asset prices. and yet, that is part of what is perpetuating the credit cycle, given that any dip in valuations is met with more buying. coming up, this week's billionaire beat focuses on what super yachts show about the global economy.

this is "money undercover" on bloomberg. ♪

lisa: i'm lisa abramowicz. this is bloomberg "money undercover." time for pension pressure. morgan stanley saying investors need to downgrade their expectations for the performance of the private investment fund.

john joins us right now with that story. the question really is, how much is this a fear of a big downturn, where these assets lose everything, and how much is just a reduction in returns expectations? john: i would say much more the latter. not fear of losing everything, but pensions face a couple of dilemmas. they are afraid they will not be making money from fixed income and stocks. on the other hand, private equity, it's very hard when you're at any scale to put your money to work, and especially if you want to put your money to work and how to earn what you -- and out earn what you could get in stocks and bonds. the one advantage that pensions patience. these are

long-term investors, so they can put their money and lock it up or a long time. they are counting on private equity to deliver that illiquidity long-term lockup premium. lisa: to that point, i recently spoke to the calstrs chief investment officer about their firms investments in private asset. he says he is in no rush to increase the allocation to pe. take a listen. >> we are not going to chase that 13% target. we are investors. we want to be a steady investor over time, spread out over the vintage years the best we can. lisa: perhaps not adding to the allocation but not necessarily detracting either. thank you so much, john. very important perspective to have on the pensions. now for billionaire beat. even the super rich are feeling skittish about the future lately, and that is causing anxiety for super yacht makers. michael joins us from atlanta for the details. the super yacht market, how important is this? >> super yachts occupy a space of about 100 feet to 500 feet.

they start in the 40 or $50 million and run up to about $500 million. so you do have to have money to purchase them. it turns out some of those people are feeling a little bit nervous. just because you have money to burn doesn't mean that you are so keen on burning it. lisa: we are talking $50 million to $600 million, you can find your range in there. is this an important market to watch to get a sense of the sentiment among the ultra wealthy? >> i think so. boats and yachts sales are a pretty good indicator of the economy. nobody really needs a boat unless you are a fisherman. they are highly discretionary. like rv sales and cosmetic surgery, they tend to go up and down with the economy. lately, they have been trending down. they should be down about 25% this year, and that has people skittish about the state of the economy.

lisa: is this because people don't have as much cash, maybe $600 million, as opposed to $660 million? >> what i'm hearing from dealers is just nervousness about the turmoil going on in the economy. you have brexit in britain, the trade war with china, you have hong kong unrest. what i'm hearing is people are nervous about deploying all that money. you not only have the upfront cost, but then you have the cost to operate these things. i am told a super yacht of 180 feet, which i boarded in fort lauderdale recently, can cost $3 million a year to operate it. that is not including the cost of crew members. it may cost $50,000 a month to dock it. these are very expensive, and it is a confidence play, as one

dealer told me. lisa: it definitely is a money sink. this also might have something to do with the weather, correct? >> probably more so on the lower end. at the same time, there is some softness in the middle market segment, meaning fishing boats and such, that has seen a deterioration of about 6%. fishing boats are down about 6% this year here. on the positive spin, some dealers are saying, maybe just some bad weather in the midwest, but nobody can say it is not a sign of a deterioration. lisa: michael sasso, thank you. speaking of big money, it is time for this week's big number. it is $17.1 billion. that is the amount of onshore bond defaults in china. at least 15 defaults this november has pushed it to within

reach of the annual record set last year. that does it for us. you can watch us each tuesday at 1:00 p.m. in new york. this is bloomberg's "money undercover." ♪

nejra: coming up, the stories that shaped the week in business around the world. trade and tariffs dominate the conversation. >> there has been whiplash over the past week or so over where these talks stand. >> we are coming down the short strokes. nejra: saudi aramco moves ahead with a blockbuster listing. >> the world's most valuable player. nejra: opec plans their next step. >> we should preventively lower production.