Billionaire Zell critical of national economy

Speaking to about 200 business professionals, Zell told the audience that opportunities for private equity investors are being destroyed by a combination of European fiscal weaknesses, slow growth in the developing world, government investment in the private markets and low interest rates.

“What is private equity?” Zell said. “It’s nothing more than a prediction, or a bet on the future.”

In September 2012, Forbes listed Zell as boasting a net worth of $3.8 billion, making him one of the wealthiest men in the world. Known as one of the pioneers of private equity investments, Zell began his career in real estate — even dabbling in it as a student at the University — and has since diversified his investments to include interests in media, sports and energy.

Zell is chairman of seven companies, including the Tribune Company, which owns The Chicago Tribune, The Los Angeles Times and 23 television stations nationwide.

When discussing the Eurozone crisis, Zell said the countries were foolish in joining a system without determining a means of leaving.

“They created a system without an exit strategy,” Zell said. “You guys are in the PE business. What’s the first rule you learn? Don’t cut a deal unless you know the exit strategy.”

Zell also noted that the Budget Control Act of 2011 — which will take effect Jan. 1, 2013 — will serve as an impending fiscal cliff. The policy, a series of drastic automatic cuts to federal spending and benefits coupled with tax increases, is the result of the failure of Congress and President Barack Obama to reach a compromise to reduce the federal deficit.

If there is no action to prevent the fiscal decline, many economists project that the U.S. economy would enter another recession.

“Grab your ass and hang on, because we don’t know what’s going to happen,” Zell said. “There’s some people who suggest that maybe nothing could be better for our country than to get some horrific incident medicines, and that might change the whole world… Obviously, most people are deathly afraid of it.”

Compared to other recessions, Zell said the current economic downturn is far more severe than what he has experienced in the past. He added that his company is currently in the “9-11 business,” meaning that distressed companies call Zell’s firm, request a buyout, and hear back within two weeks.

“In 1999, I was 98 percent leveraged and I was a multi-billionaire,” Zell said. “In ’91 and ’92 I was a billionaire (but) I couldn’t make payroll or I was worrying about making payroll. But it was all within the scale of what you could do, and the uncertainties were a great deal less and the ports in the storm seemed more obvious.”

Zell is also a vocal public supporter of Republican presidential nominee Mitt Romney. Since the beginning of 2011, Zell has donated at least $378,500 to political action committees, candidates from both parties and the Republican National Committee. His single largest contribution was $100,000 to American Crossroads, a PAC co-founded by Karl Rove, a former adviser to former president George W. Bush.

Since December 2011, Zell has also contributed $180,000 to Restore our Future, a political action committee supporting Romney. According to the Christian Science Monitor, Restore our Future has raised $96.7 million to date, and The New York Times reported in May that nearly half of the February total of $60 million stemmed from donors connected to Wall Street.

Although Zell did not overtly state his political preference during his remarks to the conference attendees, he later expressed his views to a group of investors as he was leaving.

“It seems to me no matter who is elected, 2013 is going to suck,” Zell said during his remarks. “There’s no way, whether it’s Romney or it’s Obama, that 2013 is going to be a pleasant environment.”

During his discussion with the investors, Zell also criticized Obama’s performance in last week’s presidential debate.

“Take away his teleprompter — he can’t talk,” Zell said. “He went toe to toe with Romney on numbers. Barack can’t add.”

David Brophy, the director of the Office for the Study of Private Equity Finance at the Ross School of Business, said Zell’s involvement at the University and his role in founding the Samuel Zell and Robert H. Lurie Institute for Entrepreneurial Studies has been critical in aiding student efforts.

“One could argue he’s the most important contributor to everything entrepreneurial here on campus,” Brophy said. “Without them, the seed capital, you might say for this, wasn’t there.”

Brophy added he wasn’t surprised to hear Zell speak about political issues given how outspoken the billionaire has been in the past about issues affecting the global economy.

Edward Hightower — the managing director of Motoring Ventures LLC, an automotive-focused private equity firm — said conferences like these are important to see how other private equity companies are handling a rough economy.

“What’s most valuable is you get to know what another investor is looking for, and you get to share what you’re looking for,” Hightower said.

Despite the economic difficulties, Hightower said the private equity business remained a promising field for interested students, but agreed with Zell’s assessment that adaptability was crucial in the current market.

“Economies go in cycles, and what (the current state of the economy) really does is put the onus on private equity firms to create value through really improving the operations and improving the health and success of the business over the long term, rather than just financial gains in the hopes that the business will be better after a few years,” Hightower said.

The story was updated with addition information on Sunday at 7 p.m.