Deutsche Bank: Private equity in times of monetary normalisation

15 July 2013

This paper examines the main macro-economic and financial market drivers of private equity to see what lies ahead for this asset class given an improving macro-economic outlook and gradually tighter monetary policy.

Some structural issues are reviewed – in particular the overhang of uncalled capital commitments (so-called dry powder) and the potential role private equity can play in restoring competitiveness in Europe’s periphery.

The credit cycle is a key driver of PE investments and performance. Hence, this paper will take a closer look at debt markets with a focus on sub-investment grade bonds and loans. The recent past has been characterised by an unusual combination of historically low interest rates and moderate spreads on high-yield products leading to extraordinarily lush financing opportunities. This would have been a boon for private equity were it not for countervailing forces including the still fragile state of the economy and weak monetary transmission.

Besides debt, capital committed by limited partners (LPs) is the second pillar of funding. Fundraising from LPs has recovered from the post-crisis slump. Surveys among LPs also suggest that target allocations are likely to increase further, albeit some LPs have voiced mixed feelings towards covenant-lite debt and the overhang of committed capital. Moreover, the fresh inflow of money adds to the already considerable amount of dry powder.

Overall, private equity had a restrained start into 2013 with only a slight increase over the same period last year. Investments in North America saw a stronger boost (+16 per cent yoy) whereas investments in Europe collapsed (-35 per cent yoy).

Full paper

© Deutsche Bank