I didn't choose the song, but I wish I did. I love the song. It's from our holiday video at the end of the year if you haven't watched yet. I was going to tell you to show up in the cowboy hat. But anyways, thank you all again for being here.
John, thank you for being here. Tariffs. I mean, I don't know how you start anywhere else on a day like today because the big question is when you own so many businesses, when you have so many types of debt and equity tied to companies around the world, how do you think about the way this is evolving?
So I'd start with us. The good news is we don't own a lot of businesses that export physical goods into the United States at scale, so that's helpful for us. But of course, as you point out, we're big investors and lenders to lots of companies and markets impact us. And what I'd say is we try to take a little bit of a longer-term perspective, that there is tariff diplomacy going on and that what is happening now could change depending on what market participants, what government officials do. And you've got to take that longer-term approach and hope or maybe expect at some point that they'll get to outcomes. Markets will calm. And actually, in a moment like this, you look around and say, are there good businesses that are now on sale? We can deploy capital into this volatility. So I would just say to investors, be a little bit patient here, let this tariff diplomacy play out a bit.
So as you look across the universe and try to find things on sale, what are you finding?
Well, I don't know. You know, it's so short-term right now what's happened. But in terms of the areas we find most interesting, we love to be thematic in what we do, think about sectors where there are long-term tailwinds that are quite compelling. So digital infrastructure has been a huge theme for US data centers. We've been the leading investor in the world in that area. There's obviously been concern given DeepSeek, but we continue to see big demand throughout that whole sort of value chain. We love power and energy. We think we're moving to a world of very heavy electrification. It's because of data centers, industrialization, robotics. Ultimately we invest in generation, transmission, utility services. We like franchise businesses that are capital-light. Like we bought in the last year — Jersey Mike's, we bought Tropical Smoothie, we bought a small coffee chain called 7 Brew. We love the alternatives space — stakes in other managers, secondaries, lending to private equity firms. And geographically, I would say also India is a really interesting place for us where we've leaned in, where we think there's a long runway. The last one I just throw out is this cyclical recovery in commercial real estate, which we're big believers in and have been deploying capital.
So big picture as well. People are talking about a return of the deal environment. People are talking about the return of an IPO environment. In the IPO space in particular, it's been almost stunning how slow it's been this year. Isn't that a big problem if this doesn't come back sometime soon? There are a lot of companies out there that have been holding assets for a long time.
Yeah, the IPO market and the M&A market are pretty cyclical and we've been through a rough period of time, right? We saw the cost of capital go up globally. Rates went up a bunch as central banks tightened to fight inflation. We saw spreads go up a bunch. Market participants became cautious. We had a regulatory environment that was not that friendly towards M&A activity, particularly from strategics. And I think we're beginning to see a lot of that change.
We've seen credit spreads tighten a bunch, both investment grade and not investment grade. The stock market, even with this recent trade-off, I think is up about 50% from two years ago levels. You know, I think there's a pent-up desire to do transactions and IPOs. When you have a stock market trading well, it's like a magnet. It starts to pull companies in as well. We've got a number of businesses that we're looking to take public this year. I think there's a receptivity to IPOs. But volatility like this can slow things in the near term. But if you said, look, '24 was an increase both in IPOs and M&A over '23, I think you'll see the same thing in '25. And there's sort of a mean reversion in terms of activity levels, IPOs or M&A as a percent of the public markets value. And we're below that. And there's just a lot of pent-up demand looking for liquidity. I think it will come. I think high-quality businesses want to be owned in the public markets and this week it may not feel as good, but I think when we finish the year, it'll be a better year in terms of activity.
The end of the year is a long way away. Still, John, I was just saying cumulatively. But yes, but to that end, you know, if we think about what happened this week, you know, if you look behind the greenroom, a lot of people one by one are looking at their phones, looking at the stock prices of their own firms and others. And it's been pretty ugly. Yesterday was the worst day for the S&P. This year, we've erased all the market gains since the election. Do you think that risk appetite could be significantly affected in the near term?
In the near term, certainly when you have these moments, investors tend to step back. Market participants say, well, do we want to make that big commitment today? Is the world more uncertain? But we've seen these, you know, periods of time. And again, I like to look at the bigger picture and what we see out there is still a decent economy, right?
In the fourth quarter, our private equity companies grew 7% in terms of revenues. We still have very low default rates amongst our private equity firms that we lend to today, non-investment grade lending. Our CEOs, when we asked them at the end of the year, do they see a recession? 0% in the US said yes over the next 12 months. And we see inflation continuing to moderate. So shelter costs, the biggest component of CPI, is running well below the government's 4.5% data, which tends to lag. Input costs are still pretty flat. And when we look at our companies and ask them, is it hard to hire? They say it's the easiest it's been in a few years. And so that combination of a healthy economy, some weakness, certainly on the consumer side, but overall pretty good in the US, and inflation that is moderating — maybe the pace of disinflation isn't as fast as it was a year ago — that should give the Fed some room to bring rates down, to do it very gradually. That's a pretty good backdrop. So that gives me more confidence. Again, why I think we'll see this pick up in activity.
There might be a silver lining to your point on the Fed potentially cutting interest rates gradually. Every morning, the first thing I do is look at the 10-year yield. We are down to 4.1%, which feels pretty stunning given we were flirting with 5% not too long ago. 5% was a dangerous level that investors were talking about in January potentially hitting. You're a big investor in real estate. What does that mean for the pressure that might be eased across the real estate industry, particularly the hardest hit parts?
Well, I'd start with sort of the bigger picture on real estate, which is we've been through a tough period of time, right? The sharp upward movement in rates hit real estate values, hit multiples, cap rates went up in real estate, spreads, borrowing costs went up a bunch. And then the office sector in particular, because of remote work, we saw a sharp decline in demand. And so that created a very tough period for valuations.
I think we're on the other side of that. You and I have talked about that over time. And, you know, the question is, should I be an investor in real estate? And what I'd say is, you know, whenever you have a sharp decline in value and then people stop building new real estate — we've seen a two-thirds decline in apartment building and warehouse building — then it's generally a good time to invest. And the real question is the pace of the recovery in value. If it comes purely from cash flow growth, it may take a little more time. If rates fall as they have, then you may see an acceleration in multiples and they'll happen more quickly. But the path of travel in real estate is upward. So we've been leaning in quite a bit. We privatized a number of large companies last year. Clearly, real estate is a sector that's going to benefit from a lower cost of capital. But even if it goes back up, the 10-year, I still think the path is very positive, just given the lack of new building in the space, which creates the ground really to have positive cash flow growth going forward.
I'm going to give you what I think might be a tough question for you. In the world of real estate, which is your favorite child — data centers or offices — at the moment in terms of the near-term ability to put money to work?
