January 29, 2025: Lower Interest Rates Help Private Equity

Rising rates in 2022 and 2023 put pressure on private equity. Higher interest rates make financing private equity deals more expensive, which reduces deal activity. Less demand for deals puts pressure on valuations, and lower valuations means lower returns for investors who are trying to exit those deals. The slower place of exits also means that it takes longer for fund managers to return money to fund investors. As a result, investors have less money to redeploy into private equity funds, slowing the pace of fundraising.

This cycle started to reverse in 2024 when the Fed began cutting interest rates. Private equity deal and exit activity ticked higher for the first time in three years. Valuations also rose, but notably, only in terms of earnings multiples, not revenue multiples. This is because investors put a greater premium on profitability when times are tough, rather than focusing on topline revenue growth. This flowed through to performance, with private equity funds returning about 9% in 2024, according to Pitchbook.

Private equity fundraising, however, still declined overall in 2024, with only about $285 billion raised across 311 funds. In 2023, $395 billion was raised across 686 funds. As mentioned, investors need to receive their money back before they can redeploy it. Fundraising is thus a lagging indicator in private assets. With exit activity and returns picking up, fundraising should eventually start to recover, too.

Weekly Market Update: January 29, 2025