Following a long period of low interest rates, the U.S. Federal Reserve (Fed) fought the post-pandemic inflation shock with one of the most rapid rate-hiking cycles in history.

As that inflation begins to normalize and the Fed starts to cut rates, we explore, in two articles, the relationship between interest rates and private equity performance. Our first article addressed the theory: How would we expect changes in interest rates to affect private equity? In this second article we consider what has happened empirically, over the past 40 years, to private equity returns, distributions and manager performance dispersion as rates have fluctuated.

We find a complex relationship between rates and private equity returns and distributions, characterized by a notable change in dynamics around the Global Financial Crisis (GFC) of 2008 – 09. We conclude that, while rates clearly influence valuations and the cost of debt for private equity deals, private equity performance and distributions are primarily determined by the strength of the underlying economy. We do find a meaningful relationship between rates, loan spreads and manager dispersion, however, which suggests that top-performing funds may be able to capitalize even more on favorable economic conditions than lower-quartile funds.

You can now read the full whitepaper at the link below