Slowing economic activity together with higher inflation and rising interest rates has shaken global equity markets. As with prior market inflection points, asset owners are taking a close look at current portfolio allocations.
Pre-Covid, investors were already increasingly looking to alternative investments to meet their long-term investment objectives. Private equity (PE) AUM in particular is forecasted to double by 2025 from $4.42 trillion in 2020, a trend that may become more pronounced, as public market volatility adds to the appeal of private assets.
At this critical juncture for markets, however, allocation decisions are not always straightforward. To put the health of private equity markets and long-term return trends into context it is critical to understand (1) the main performance drivers within the asset class, and (2) the critical importance that market timing has for PE vintages during downturns. Here we analyse the three performance contributors driving long-term return trends— leverage, multiple expansion and earnings—and investigate how current conditions for each factor may shape returns into the future.
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