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Private Equity Snapshot: Potential Prospects for Falling Rates Bode Well for New Vintages
Justin Pollack
Managing Director, Private Funds Group
Since 1988, a drop in the rate of three-month Libor, the main reference rate for debt until the recent switch to SOFR, portended good times ahead for leveraged buyout deals. As the chart shows, LBO funds from vintages that started investing in a period of falling rates showed stronger performance than in prior years, with declining rates providing tailwinds to funds raised in the early 1990s, the early 2000s, and starting in 2009. Each of these periods experienced a recession, which presented an opportunity to invest in cyclical businesses believed to be poised for a rebound, with the added enhancement of falling debt costs over the course of ownership. Conversely, sharply higher rates beginning in 1994 and 2005 dealt a blow to buyout fund returns in the corresponding vintage years.
Bottom Line? Rapid US rate increases are likely in the rearview mirror as recession risks cause the Fed to consider pausing and then lowering rates – which means new private equity vintages could be coming to market at an attractive time.
LBO Fund Returns Have Historically Shown an Inverse Relationship to Interest Rate Moves
Change in interest rates vs. LBO fund IRRs (1988-2019)
Source: Bank of England, three-month London Interbank Offered Rate (Libor), retrieved from FRED, Federal Reserve Bank of St. Louis; LBO fund performance from Preqin database as of 30 September 2022.
Disclosure
Investing involves risk, including possible loss of principal. The information presented herein is for illustrative purposes only and should not be considered reflective of any particular security, strategy, or investment product. It represents a general assessment of the markets at a specific time and is not a guarantee of future performance results or market movement. This material does not constitute investment, financial, legal, tax, or other advice; investment research or a product of any research department; an offer to sell, or the solicitation of an offer to purchase any security or interest in a fund; or a recommendation for any investment product or strategy. PineBridge Investments is not soliciting or recommending any action based on information in this document. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author, may differ from the views or opinions expressed by other areas of PineBridge Investments, and are only for general informational purposes as of the date indicated. Views may be based on third-party data that has not been independently verified. PineBridge Investments does not approve of or endorse any republication of this material. You are solely responsible for deciding whether any investment product or strategy is appropriate for you based upon your investment goals, financial situation and tolerance for risk.
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