Fed Rate Rise Adds Further Turbulence To Global PE Markets

In previous years systematic market risks were restrained by central bank actions (e.g. loose monetary and fiscal policy), but current macro-economic turbulence means it is now critical to develop an optimal private equity strategy to protect against volatile markets

The new CEPRES PE Market Outlook highlights localized investment opportunities in buyouts, growth, venture, debt, infrastructure and real estate markets caused by global macro-economic turbulence. The report also uncovers risks compounded by capital overhang and increasing asset prices in the medium term. An increased significance on value creation in operating companies is emphasized to maintain returns in the next economic cycle. Localized circumstances create short-term opportunities for private equity investors to take advantage of prevailing conditions and avoid overheating markets.

• In the US uncertainty over further rate hikes and continuing growth prospects
• Europe is dominated by unstable political and economic situations
• The threat of a further Yuan devaluation hangs over Asia
• Risks are building with increasing capital overhang (dry powder)
• Increased leverage adds risks to some developed private equity markets
• Pricing multiples are being driven up
• Some markets continue to support leverage finance and multiple expansion for return generation

Comment:

“In previous years systematic market risks were restrained by central bank actions (e.g. loose monetary and fiscal policy), but current macro-economic turbulence means it is now critical to develop an optimal private equity strategy to protect against volatile markets. Those with too high diversification can miss their portfolio targets through systematic market risk (beta), but also limit manager specific outperformance (alpha) that can hedge against market shocks. In such markets, we recommend a focused strategy by selecting defensive managers with proven ability to create value in operating companies. In other markets, with attractive sentiment, it makes more sense to bet on market developments rather than take single manager risks, and therefore increase diversification.”

Daniel Schmidt – CEO – CEPRES GmbH