Recent market movements and economic data have signaled a regime shift in the underlying investment environment that will have a significant impact on private equity (PE). We wrote about this shift from a high-level macro perspective in a previous note. The post-pandemic regime was characterized by near-zero interest rates, excessive monetary and fiscal stimulus, easy credit conditions, and manageable inflation that fueled an unsustainable rise in asset valuations. The new regime, highlighted by uncomfortably high inflation, has put policy makers in a difficult position that will lead to less support of economic growth and financial markets.
In this report, we cover the key elements of this new regime and how it might impact the PE market. While PE dealmaking will be supported in the short-term by a near-record amount of dry powder and a robust funding market, investors will face several challenges, including rising interest rates, lower valuations, and less liquidity to support exits.