New CEPR/LTI Report on 'The Private Equity Industry in the New Interest Rate Environment'

Thursday, February 24, 2022

A new CEPR/LTI report by Victoria Ivashina analyses the dynamics at play that shape the development of the global long-term investments industry and its interaction with monetary policy and explores the consequences of deceleration in its growth.

The immediate post-global financial crisis period, during which the private equity industry has grown substantially  has been characterised by declining interest rates, easy credit and a large pool of capital searching for yields and long-term investment opportunities. The past decade, however, has marked a new monetary policy regime: short-term interest rates (the traditional monetary policy tool) have been trapped at zero. While rates might start to rise again, what is clear is that the favourable dynamic of declining rates that, for decades, drove capital into the alternative space will no longer be there. This development means the strong tailwind experienced by the private equity industry is bound to diminish which is likely to redefine its role and economic significance in the decades to come.


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The report is the first in a series edited by Pietro Garibaldi and produced in partnership with the Long-Term Investors think tank at the Università di Torino and provides an insightful introduction to the forces which shape the private equity industry, as well as thorough and timely analysis of the challenges it faces in the years to come. The author shows how the level of interest rates  is central to understanding the inflow of capital into the private equity industry throughout its history, and explains how, due to the nature of the private equity asset class, its growth follows a unique trajectory, which can only be understood if viewed through long, overlapping cycles.  

The core message is that as interest rates shift from a decade-long decline to hovering at the zero-lower bound and potentially increasing significantly, the private equity industry will face new pressures – the inflow of capital to this asset class will likely decelerate, leading to an increased scrutiny of costs and an opportunity to shift bargaining power to limited partners. At the same time, the private equity industry has made promising steps toward innovation to preserve momentum, such as longer holding periods and a broader investor base. However, adverse macroeconomic pressures will likely still prevail, affecting the industry’s growth and, subsequently, its cost structure. 

You can also read a VoxEU column here