FORTUNE — Credit is the fuel of private equity, often allowing buyout firms to contribute just 30% or 40% of acquisition prices. And the better the credit terms, the more private equity firms stand to gain.
So one would think today’s near-zero interest rates are a boon for the industry, but The Blackstone Group’s (BX) Tony James thinks the pendulum may have swung too far.
Speaking this morning on a media call to discuss the firm’s Q4 earnings, James said that “the hot credit markets are more of a negative” for the firm’s investing business.
First, easy credit makes it more likely that troubled companies will refinance, rather than sell. That lowers the overall deal supply, which can (at least theoretically) drive up prices of what remains.
More importantly, the low credit environment has been driving up prices. And James fears the trend will continue, as more money comes off the sidelines and moves into equities (since there isn’t enough yield in debt).
All of this could be “cured” by higher rates but James doesn’t see that coming anytime soon.
James also said that the rumored Dell (DELL) buyout is not having much impact on current deal-flow, in terms of bringing larger targets to the fore. Nobody was doubting the credit availability for large deals, he argued, and the deal’s equity requirements are unusual in that so much of it is held by founder Michael Dell. The only possible consequence, James says, is that it could cause private equity firms to look harder at mature technology companies.
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