The Impact of Interest Rates on the Private Equity Industry

In December 2023, Apollo Asset Management Co-President Scott Kleinman made a bold prediction contrary to the market’s expectations. While many were anticipating multiple rate cuts in 2024, Kleinman stated that he would be betting against any rate cuts. This contrarian view has proven to be correct so far, as rates have remained steady. Despite this, the impact of higher interest rates has not been entirely positive for the private equity industry.

The private equity industry has faced challenges due to the persistence of higher interest rates. The buyout deal count for the year through May 15 has decreased by 4% globally compared to the previous year. This decline comes on the heels of already subdued activity in 2023. Additionally, the reluctance to invest has resulted in a significant amount of dry powder amounting to $1.1 trillion within buyout funds awaiting deployment.

Despite the challenges posed by higher interest rates, Scott Kleinman remains optimistic about the current economic environment. He expressed his comfort with the current interest rates, emphasizing that Apollo Asset Management has been one of the few private equity firms advocating for higher rates for several years. Kleinman believes that higher rates promote greater discipline in corporate valuations, leading to the identification of more compelling investment opportunities at reasonable valuations.

As a value-oriented investor, Kleinman views higher interest rates as a catalyst for more disciplined decision-making in the private equity space. The emphasis on intrinsic value and prudent valuation methods becomes more pronounced in a high-interest-rate environment. This approach enables investors to identify undervalued assets and capitalize on opportunities that may have been overlooked in a low-interest-rate environment.

Looking ahead, the private equity industry must navigate the evolving interest rate landscape to capitalize on emerging opportunities. While higher rates may introduce challenges in terms of financing costs, they also create a conducive environment for value-driven investors. By maintaining a disciplined approach to investment and leveraging the benefits of a higher interest rate environment, private equity firms can position themselves for long-term success despite the prevailing economic conditions.