Apr 29, 2024 - Business

Private equity deals defy the lack of rate cuts

Illustration of a tip jar with an upward arrow in masking tape on the front.

Illustration: Maura Losch/Axios

Conventional wisdom entering 2024 was that private equity dealmaking would surge on a series of interest rate cuts by the U.S. Federal Reserve.

Fast forward: The prediction was right, but for the wrong reasons.

By the numbers: U.S. private equity activity is up 54% year-over-year, with nearly $132 billion of deal value, according to LSEG.

  • This is slightly lower than the overall U.S. M&A increase of 59%, but easily outpacing global M&A (35%) and global private equity (25%).

The big picture: Rates haven't budged and optimism for multiple cuts has been fading as the year has progressed. Nonetheless, U.S. private equity activity has accelerated.

  • One month ago there were 77% odds of at least one cut by July, but now that's down to 32%.
  • Domestic private equity was up 34% through the end of March. Again, the figure is 54% through last Thursday.

Behind the scenes: There are several reasons why the market is defying the macro.

  • The simplest is that private equity is still sitting on record amounts of dry powder, and the industry has never shown an appetite for curbing fund sizes.
  • And those inflows are expected to continue, with State Street this morning releasing survey data showing that "the rotation from public to private assets within portfolio allocations will grow further in the coming years."
  • Moreover, the confluence of high equity values and interest rates have inspired many companies to sell. This includes companies owned by private equity, as so much dealflow now is sponsor-to-sponsor hot potato.

What to watch: How investors react if the Fed doesn't cut rates at all before Labor Day. Based on recent experience, it might not amount to more than disappointed shrugs.

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