Private equity may be heading for a fall

If investors in equities and debt markets will remember anything of the first half of 2022 it will be generational sell-offs. But the turmoil in public markets has not yet fully bled into private equity: fundraising has marched on, large deals are still being consummated and paper returns look strong. The blood, however, may be about to flow. Buy-out barbarians made their names in the late 1980s, not the 1970s, for good reason. The corporate buy-out is a financial ploy unsuited to the coming period of slow growth and high inflation; no previous boom-and-bust cycle in private-equity’s 40-year history has been like it. Most important, cheap debt is unlikely to be able to save the day.

If trouble is to strike, it will hit an industry that is now hubristic and vast. The amount of money invested, or waiting to be invested, by private-equity funds has swelled from $1.3trn in 2009 to $4.6trn today. This was driven by a scramble for yield among pension funds, insurance companies and endowments during a decade of historically low interest rates in the aftermath of the global financial crisis of 2007-09. Many have more than doubled their allocations to private equity. Since 2015 the ten largest American public-sector pension funds have collectively committed in excess of $100bn to buy-out funds.