On first instance, it appears that the private equity market woes stem from higher interest rates and macroeconomic volatility, and thus pressures would remain transient.
Opportunities will remain abundant for the time being. Authorities seem intent on tightening banking regulation and thus credit, leaving more opportunity for private financing.
This is where the good news ends. A decade of ultra-low yields has reduced the cost of money and also driven many investors into alternative sources of financing.
A normalised and higher yield curve will drive investors away from the private equity sector over the longer term, financing will become scarcer and more difficult to obtain, and pension funds will have viable alternatives.
We should expect some pressures to abate about a year after the Fed is finished with tightening rates; that is, around 2025. An easier macroeconomic backdrop and lighter credit conditions could help improve the flow of deals. But we should not expect pension funds and other big players who saw the asset class as an alternative to zero-interest fixed income to return en masse.
Additionally, over the longer term, we should not expect heavy bank regulation to last ad infinitum. The regulation/deregulation tug of war has tilted far into the side of regulation. The next iteration, whenever that may come, would probably include lighter regulation. That could have already happened, not for the US banking crisis in March.
Barring a turn in fortunes, we feel that the golden age of private equity might be behind us. Private equity owners had a chance to introduce their funds to the wider market, and that is good. Now, they will have to think of more ways in which their product can become appealing to institutional players in the age of higher yields.
George Lagarias is chief economist at Mazars Wealth Management
