Yahoo Finance Goldman: Private equity will have to go ‘back to the future’ in new rate environment
The end of the era of cheap money means private equity will have to go “back to the future” to ensure they make returns, a Goldman Sachs executive has said.
In an interview with the Financial Times, Marc Nachmann, global head of asset and wealth management at Goldman Sachs, said private equity firms would have to change strategies to cope with rising interest rates.
“Over the past 10 years you could rely on lots of leverage, cheap cost of capital and multiple expansion, and you made your returns that way,” he said. “That will be harder to do going forward”.
Private equity has expanded rapidly over the past decade, fuelled by easy access to credit. According to Preqin, the global private equity market surpassed $4.7trn at the start of 2021.
However, the sector was dealt a blow by the recent increase in interest rates, which has dented valuations and put up the cost of financing deals.
While markets expect interest rates to start being lowered in the first half of this year, very few economists think rates will return to the historic lows seen in the 2010s. This will mean current business models in private equity will come under increasing strain.
Nachmann said that private equity investors were really “digging in” to see how firms have made returns in an attempt to gauge whether performance has been generated from leverage or operational improvements.
He suggested that private equity could return to how it previously worked, when it focused more on targeting underperforming divisions and making major internal improvements.
In the new world, Nachmann said a lot of the returns will come from “sourcing really good opportunities” and making “operational improvements”.
“It will be a little bit back to the future,” he added.
