The Stock Market Is Loving Private Equity’s New Normal

The private equity industry has rediscovered its mojo. The latest updates from the publicly traded firms specializing in the asset class satisfied investors’ appetite for bullish vibes from the leadership teams. As shares in alternative investment managers build on an already strong recovery, the risks of disappointment can only mount.

The stunning change in sentiment around private capital managers is driven by confidence that interest rates have peaked, bringing some predictability to the cost of capital. Spreads – the extra cost to reflect the risk of the borrower – have fallen. Buyout firms should find it easier to refinance existing investments and initiate new transactions that see idle client funds — “dry powder” — start earning fees.

Healthy Alternatives

At the same time, the stock market is running hot. A new record for the S&P 500 may set the stage for a resurgence in corporate M&A and new stock sales. Buyout firms could then exit maturing investments and take a cut of any gains. Rising stocks also rebalance institutional investors’ portfolios between public and private markets, reducing the weighting to illiquid assets. That releases a brake on allocating fresh funds to buyout firms.

Then there’s the growing appreciation of the listed players’ diversification away from conventional private equity, typically into credit and so-called secondaries, which buy stakes in other funds’ deals or the fund itself. These have provided a source of fee income that runs on a different cycle to traditional US and European private equity activity. The firms are no longer buyout shops, they have become “platforms.”

A Welcome Return