PitchBook News - PE's tide finally turns

At the forefront of those developments has been the long-awaited shift to monetary policy easing after the Fed cut short-term interest rates by 75 basis points at its September and November meetings.

While some emerging weakness in the labor market motivated the Fed to act, including an increase in the unemployment rate, economic growth has remained quite strong. Given the underlying strength of the economy, we expect a more moderate pace of rate cuts moving forward.

However, there is no question that lower borrowing costs and the prospects of further reductions have helped kickstart buyout deal activity. Total deal value over the past two quarters reached its long-term trend after more than two years of below-trend value.

In addition to lower short-term interest rates, strong growth, disinflation, tight credit spreads, and an ample loan supply are providing a very supportive backdrop for buyout dealmaking. If these conditions persist, we expect that buyout deal activity will continue to heat up, especially now that the uncertainty stemming from the US presidential election has ended.

Although rate cuts are a tailwind for dealmaking, their impact on the potential returns of new buyout investments is not as straightforward.

Lower interest rates should support higher entry valuations that are already elevated, which could offset any potential gains from higher leverage afforded by reduced borrowing costs. These elevated valuations are one of the main reasons that allocators expect long-term PE risk premiums to be their lowest in at least the past 12 years.

The green shoots developing on the buy side should also bode well for a better exit environment, which buyout managers desperately need.

Our data shows that deals and exits have historically been driven by the same factors and have tended to move in tandem, typically hitting peaks and troughs within two quarters of each other.

For more details and supporting data on these topics and more, please download the free report:

Quantitative Perspectives: Turning the Tide