Bloomberg Audio Studios, podcasts, radio news. Let's get over to our panel. Shanalie Basket is standing by with the CEO or speaking with the CEO of Carlisle, Harvey Schwartz Schnelli.
Not only are you running one of the most storied private capital firms on the planet, you were also at Goldman You navigated very tough moments from the c suite, including in the wake of the two thousand and eight financial crisis. So you've seen a lot in markets, a lot of ups and downs. Yeah, how do you look at the environment that we're in today.
Well, again, it's great to be here. Congratulations on what's going to be an extraordinary event. I think it's my birthday next week, I'll turn sixty one. I think in my lifetime the trends geopolitically have been extraordinarily favorable. And I think that certainly some horrific things have happened. But if you think about the Berlin Wall, globalization, and I would say that this is the first time we're really entering a period of what i'll call geopolitical economic tension.
And so let's just pause on that for a second. Coming into the election, there was a lot of uncertainty. I mean, it seems like a long time ago now, but if you think back to the fall, there was uncertainty about whether or not we would have an outcome, certainty around who the new administration would be. The administration ran on a policy very pro business, pro growth, all the factors that support that, and so markets reflected that, and I think there was this huge relief factor in
knowing that there was certainty in the administration. It was a sweeping victory, consolidated government and the ability to execute Now, tariffs were always in the discussion. What's happened now is and the markets are obviously reacting to it in a fairly material way, is we're starting to see what is the full poll let's see mandate going to look like.
And the reason I started with geopolitical economic uncertainty. And obviously if we've had geopolitical uncertainty with the tragic war in the Middle East and the tragic war in Europe, but the geopolitical economic concertainty, it's a bit of new. It's a new information set and the opinions on tariffs vary from there. Incredibly inflationary too. They are potentially contributing to a recession, and so it's a bit of now uncertainty.
And what the election originally people grasped to was certainty, Marcus like certainty, and so now we're in a period of uncertainty, and I think you're seeing it in the risk reduction that we've seen over the past several days and obviously this morning.
Also when you look at what's happening with the tariff's strategy, I'm guessing this kind of comes into part of that geopolitical uncertainty. At what point are you worried about it crossing over into a tariff war? Is this all kind of par for the forest what we're seeing right now, or is there a risk of serious escalation?
Okay, so tarif's a complicated subject that doesn't really get unpacked very often. So let's just try and do it super fast given the time constraints. But if you think of tariff's, let's just split the conversation to two things really simply one will let's just say economic policy and sended tariffs, which can make a lot of sense. We have the lowest tariffs in the world relative to other countries, and then you have tariffs that are motivated by let's say,
political objectives social objectives. So first of all, you have to unpack the two. This bucket I think can be reversed much more quickly. We've seen that in discussions and negotiations. This might be stickier depending on what's happening. But in terms of and you asked, your language was perfect, Shanali, because the real question is are they inflationary? And a one time tariff let's just say twenty five percent on
a country. A one time tariff is a one time step up in price acceleration, but it's not sustainably inflationary. Trade wars are sustainably inflationary because then, of course you could perceive a twenty five percent step ten ten ten, And I think that's what the market is now responding to. But what the market's really responding to is increase uncertainty because we just don't know where the tariff discussions are going to go.
It's too early to the point you're making on uncertainty and the earliness of the conversation. How do you think about this as it pertains to your business?
Do you have to make changes?
Are their portfolio companies that are structuring differently? Are there deals that you can't do right now because you don't know what the tariff impact is going to be.
So the vast majority, so for those of you are not as explicitly familiar with Carlisle, we're four hundred and forty billion of assets. We're one of the largest private capital managers in the world. That's split across real estate, private equity, credit insurance, which is our largest segment, and our solutions secondaries and co invest business. We're micro investors.
So as micro investors looking to invest capit, whether it's in private equity or in direct lending, what we're looking for are opportunities to deploy capital at attractive risk return. So we don't as a when we wake up in the morning, we don't seek to avoid risk. We seek
to price it correctly. And so in an environment like this, for sure, if you're looking at a portfolio company opportunity, when you think of the value creation plan, you're factoring in now the uncertainty, which undoubtedly will impact the extent to which you're willing to pay for that asset. And so yes, now, in our existing companies and our existing portfolio, the vast majority of our services company and services companies
don't have basically the input issues. But I will say that when we look and we roll up all this data for all of our portfolio companies, and it's quite rich. We have. It's just down now below a million employees globally around the world, three hundred Carlisle itself. But in our portfolio companies, we roll up this data every month. For example, when the PMI yesterday, the inventory component of
PMI was up about four points. I know that's not really news that anybody probably would have focused on, but we could see that happening months ago. So immediately when it looked like the new administration was going to come in and there was the possibility of tariffs, you could see purchasing managers immediately mobilizing to start bringing goods in faster because of the uncertainty factor.
So what are the things that you see now that investors are going to.
See four months later? So today, nothing about today looks dramatically different than three months ago. By that, what do I mean? EBA DOUG growth is quite solid, earnings are quite solid. The factors around input pricing there's still marginal pricing capacity and demand seems quite high. The consumer seems quite resilient. I think the administration inherited quite a stable economy.
You know, inflation obviously not exactly where the Federal Reserve would like it, but has come down dramatically, and so the environment feels quite good now in terms of what we're seeing in that data. There's nothing suggesting today that the economic underpinnings of that have shifted dramatically at all. Well, you're starting to see those are the things I just described, which is preemptive actions around how best the position again
around the uncertainty. The way I would describe it is, for a long period of time, you know, geopolitical economic risktails were very tight. They're just fatter today. And we'll have to see over the next three, six, nine months how the tariff discussions play out and what does it mean. But this uncertainty factor obviously is affecting markets.
You started to hit on this a few minutes ago about inflation and worries about the impacts that tariffs would have on inflation. One time, more more persistent. Where do you see the direction of travel? More recent economic data has created some cause for concern among investors.
Yeah, so, first of all, we just came through an impressary period and I got to give. And I know that the data around the Federal Reserve happens a lot. It always surprises me because I think the Federal Reserve and Jpal's done an extraordinary job navigating a massive spike in inflation. You know, we went through an impressive period of rate hikes. There was a big audience calling for rates back to zero. I have no idea why anybody
would want rags back to zero. Rates back to zero is not a normal way to run an economy, and we certainly shouldn't be wishing for that. In terms of getting inflation down, that's a very, very difficult thing to do, and I think the Fed has done an extraordinary job. I think at this point, given we don't exactly know how the tariffs will ultimately settle, I think the inflationary
question is a bit uncertain. So what I mean by that is there is a path where you could see a one time bump in prices, assuming there's no trade waror no future escalation, that will translate through the system as higher prices. They also cause some demand destruction, which longer term would be deflationary, and you actually could see
the economy experiencing stress as it goes through that. So I would say that all the parameters around forecasting inflation, forecasting interest rates again, I just think we should be we should all buckle up a bit because markets will be more volatile, super data centric, probably two data centric, because you can't extrapolate one data point to the future. But it's going to be a sort of a wait
and see. I do think the administration will be very sensitive to pro growth policies, and so I think they'll be watching also.
So with that push pull going on, what you're looking at as a market that has changed so drastically in terms of rate cut expectations. You had a number of investors feeling like maybe you might get a rate hike this year coming into this year, but market consensus now you have shifted from maybe one rate cut to three. Market pricing overnight went to three rate cuts this year.
Yeah, does that make sense to you? So we we were never in a camp United's discussion two years ago. We've never been in a camp that the Federal Reserve was going to cut rates aggressively. Our strategic economist has really nailed this, Jason Thomas. If you don't read his work, he really should. I've worked with some extraordinary people in my career, real privilege, and he's extraordinary, but he has the benefit of rolling up all our data, so he's
been saying for a long time rates were stickier. I just spoke to him before I got on the show, and he said, listen, it's more complicated now to have a very firm opinion again period of uncertainty. But it's not surprising to me that the market is shifted to this because of the unknown around tariffs. And I think what the Federal Reserve has proven to us is they're very data centric because they know they're in a situation that is somewhat novel, so they're going to be very
data centric. They're going to do what they need to do. So if you see inflationary pressure, they're going to moderate up. If you see deflationary pressure or a slowing of the economy, I think the Federal Reserve one thing that proved us now for a very long time. They know how to cut rates, and they're going to cut rates if they need to. But it's not surprising me that the market
is forecasting more of that. But also we were sort of shocked when they were forecasting five six cuts and we were calling for one or two.
So want to back out for a moment, because coming into this year, there was a lot of investors saying America first, and you saw the broader market really reflect that trade that has changed. You have seen a lot of money flow into international markets. Carlisle's a global investor. Is American exceptionalism at risk?
I wouldn't bet against America. You know, if you go back to the nineties, when in the mid nineties European Union in the United States had the same GDP. Here we are twenty five thirty years later, we have ten trillion dollars more for GDP. There's a lot of fundamental reasons for why that occurred. We don't need to go through them. I think that as a global firm, we see opportunity and lots of places. So we have taken in the past several months three companies public standard are
in the United States. We just two weeks ago took Hexaware public in India. It's the largest private equit owned company to ever go public in India. We took a company called where Good Coats an X ray technician, an X ray technical company in Japan public. It's the largest ever private owned equity company in Japan. All of this in the past six months, and our portfolios have gone up five billion in value. We've returned a lot of
value to clients. I would say that is it surprising that after the SMP was up fifty percent plus in two years and the rest of the world had lagged, that there's been more capital moving overseas. No. I do think that if you're going to have a European Union that's going to be very focused on, for example, of defense, which is not a surprise US. We've had an aerospace depends practice for a very long time on the heels
of all the global conflict. Defense is going to be a sector that's going to grow securely again for a very long period of time, regardless of tariffs, it doesn't matter. And so in a period where you go from geopolitical and globalization to less globalization, you're going to have increase spending on defense. So you're going to see defense bocks go up in the US. I think it's all seems quite rational tonight. But no, I wouldn't bet against America.
So I want to shift gears a bit now because there's this dynamic going on in the markets where you have, of course, the public markets, and then you have the private markets, which of course you operate well, and you've kind of operated many times through both and throughout your career. So in the mid nineteen nineties there are more than seven thousand companies. Now there are less than half of that. Many people talk about that being the dynamic of the
situation we're in. Nobody talks about what the implications are if you have such a vast private market, what do you do with that? How do you get more investors' access to that?
So you nailed it. I mean, if you went back plus years there or twice as many public companies, I think there were eight times as many public companies. If you went back even farther now there's two and a half times as many private companies. And the private capital formation has been a trend that has been incredibly persistent
for lots of very meaningful reasons, and it's secular. It's not going to change any Any prediction in terms of the sustainability and durability of private capital suggests it's going to keep compounding at ten percent, So it'll be a you know, twenty five twenty six trillion dollar market before we blink in terms of private capital. Now, what's happening is there are a lot of forces in the system
that are driving more capital to private markets. Demand from insurance clients as they look for private investment grade, and of course the biggest factor is, and a lot of you involved in this business, is what's happening in wealth. And really, if you look at whether it's one, two, three percent of portfolios in wealth individuals portfolios today managed by people in this room, then if that grows to five, six,
seven percent, we're talking about an enormous trend. And I think the stats on US pensions, for example, forty percent are in alternatives. Ultimately retirement accounts will be in private capital. It's the perfect balance of liability and return and it gives investors diversification. So ultimately, yes, for sure, a pace of which hard to predict. But the wealth transition to private capital, for sure, is a durable transition. Should be the asset class makes a lot of sense for a
lot of people, advisors. I've spent a lot of time with advisors in the past two years, so Carlisle has been in that part of the business for a long time, but it wasn't strategically important as initiative. When I showed up, we switched to all that We've reorganized the team. It's one of our fastest growing areas. But this is again we scratch this surface globally on wealthy individuals participating in these markets so that capital stream will continue to come in.
How do you think about what might need to change about the industry in order to make this more available to wealth clients as opposed to institutional clients who have been able to get into a private fund hold it for a very very long time. Now you have investors barring therefore, oh one K that might want more liquidity, and do you think that that presents another set of risks to a mismatch.
Perhaps so, I think the only I think the only thing that gets in the way of the industry and the growth of this is the industry. So if we execute at Carlisle, we don't want to rush. This is all about performance. If we say we're going to do it, we have to do it, and we have to understand the ultimate wealth client is managed by an advisor or an RIA or one of the big platform partners that
we work with. That is our oblique and as long as we deliver the performance consistently over a period of time, with all the risk factors understood, then we will be successful in the industry, really successful. The only thing worries me sometimes is there's a bit of an arms race. It seems to develop solutions. There's clearly competition on the advisor side, you know, Carlisle, I'm super fortunate that I had the opportunity two years ago. It's you know, it's
a really iconic name in finance. It's been around for you know, well over thirty five years. You know. To be successful in this industry, particularly this segment, you need global brand recognition. Carlisle's well known. We have wealth partnerships in the Middle East, in Korea, in Japan, and we tend to think in a very US centric way that the wealth phenomenon is a US centric phenomenon. It's a
global phenomenon. And that's why I feel confident in saying over the next five ten years, you'll see this trajectory of growth.
So we talk about private markets like it's a on a list, but of course it's private equity and private debt, and infrastructure in real estate and all of the above, private credit in particular has gotten a lot of focus. At one point six trillion dollar market of direct lending, it seems that the industry is pushing away from just that into new places. What's the biggest growth area in your mind, and what is driving it? Are there mega forces that will make this industry much bigger?
So I don't so there's a flywheel effect in capital formation. This exists in public markets. I mean, if we went back many many years ago, ETFs were new, then they became very efficient tools. Then they became some of the most popular tools that exist in the marketplace for investors. For a lot of obvious and very rational reasons, it's very hard for finance professionals to create demand for a particular form of capital. I don't think we're actually particularly
good at that as an industry. When we really are operate well in finance, and having seen it at you over thirty plus years, when we really operate well is when we truly understand the client demand for capital and what is the client demand for capital. The businesses that get supported by this capital are just looking for the most efficient form of capital, so they're not being sold
direct lending. They're choosing direct lending over other sources. So, but what has happened direct lending in many regards, which has been around for a long time and really grew
quite quickly over the past cause five years. What's really happening though, is the understanding of the capital choices continues to expand, so direct lending will continue to grow, although more mature today, but now asset based finance and there are forces and asset based finance, private investment in grade returns and really at the end of the day, what allows us to be most effective at nationality is we
have the right liability structure. So because we have longer liabilities which our clients provide us, whether they're wealth clients, institutions all around the world, we're able to structure and to play that capital. But again it has to be the most efficient marginal capital for the end user. There's
no creating something and people come. These are really thoughtful business owners that are choosing to use that capital because it's the most efficient capital, and that's what we have to provide.
Harvey, we are out of time. You spared yourself from my lightning round. Although what are you doing for dinner for your birthday?
You can have that. I'm hosting the first partner offsite Carlisles had in a long time. They asked me if I would do it on my birthday, so I said, so, all of our partners are going to an off site for two days. I'm super excited about my birthday.
That sounds like flash thanky, everybody welcome, not that helpful.
Thanks so much. I have a great conference.
And that was Carlisle CEO Harvey Schwartz speaking with Shanali Basic