Private equity faces challenges amid high interest rates

Experts predict a significant uptick in global deals as private equity adapts to a tougher environment

Private equity faces challenges amid high interest rates

Private equity must contend with a “lost generation” as interest rates remain high, according to Ontario Teachers’ Pension Plan chief strategy officer Jonathan Hausman, as reported by BNN Bloomberg.

“In the private equity world, we’re probably looking at a little bit of a lost generation of vintage,” Hausman said at the US-Canada Summit in Toronto.

The buyout industry faces its toughest environment since the 2008 financial crisis. Higher borrowing costs have reduced deals, hampering fund managers’ ability to return money to investors such as pension plans, endowments, and wealthy individuals.

“The private equity players don’t like to sell their companies” at a discount, said Martin Longchamps, head of private equity at Caisse de Depot et Placement du Quebec, at the same event. “But those companies, since we haven’t had a recession, they’ve grown into those valuations.”

Longchamps expects a “significant uptick” in deals globally in the next six to 12 months. Limited partners “want their money back,” he said.

Currently, buyout shops are adapting to the deal drought by using new techniques, such as carve-outs, continuation vehicles, and profit-sharing with employees, said Hausman, who predicts large private equity firms will consolidate.

“When there’s a greater amount of risk, generally speaking, this leads to a consolidation,” he said. “Things will get better, but it will be because people adapt — not because the conditions revert.”