The private equity landscape in 2024 faces strong headwinds amidst rising interest rates and tightening lending conditions. Initiating new leveraged buyouts has become more challenging and expensive, requiring investors to adapt their approach to generating returns. With frothy multiples persisting even as debt costs surge, selectivity is critical in pursuing new deals. According to PineBridge Investments, attractive opportunities may lie in the middle market, where smaller deals offer more potential for operational improvements to offset challenging financial conditions. Investors also appear focused on strategies to accelerate liquidity, like selling non-core assets as exits via IPOs, sales to strategics, and secondary buyouts face obstacles. Though private equity returns have outperformed public markets over the past decade, it remains to be seen whether this premium can persist in the current climate without the tailwind of cheap leverage. Savvy investors with the ability to discover value beyond traditional financial strategies may still uncover opportunities.

"Initiating a new buyout is more challenging and expensive today than it was 18 months ago, as the higher cost of debt is not offset with lower purchase prices. This reality has required many private equity investors to adapt their approach to add value in portfolios."

Justin Pollack & Steven Costabile, PineBridge Investments

According to a new report from the New York Fed, spiking delinquency rates on credit cards and auto loans indicate growing financial stress for American consumers. After delinquency rates reached historic lows during the pandemic due to stimulus payments and loan forbearance policies, they have been steadily rising over the past year as temporary measures have expired. Now, delinquencies have hit their highest levels since the Great Recession. This upswing likely reflects the impact of the Fed's aggressive interest rate hikes, which have significantly increased borrowing costs for households. With higher debt burdens and rising prices squeezing budgets, more consumers appear to be struggling to keep up with payments. While the overall economy has so far avoided recession, rising delinquencies are one of the few worrying signs that the Fed's tightening cycle is starting to take a toll on household finances. If this trend continues, it could constrain consumer spending, which has been a key pillar of economic growth.

The latest Canadian Investment Trends Survey from Altus Group reveals shifting investor preferences amid economic uncertainty. Overall capitalization rates rose slightly to 5.88% in Q4 2023 as transaction volumes halved over 2022, indicating weakening investment activity. Investors gravitated toward stable assets like suburban apartments, industrial facilities and retail strips. Vancouver leapfrogged Toronto as the top market, while industrial and multi-family remained in demand despite moderating from levels earlier in 2023. Notably, office assets struggled with elevated vacancies and rising rates. Cap rates escalated across most segments with the exception of downtown Toronto office spaces. Additionally, momentum showed signs of waning with more investors inclined to sell across the majority of sub-classes, most notably office and mall properties. As the Bank of Canada sustained hawkish policies, investors took shelter in low-risk sectors while capitalization rates drifted upwards in the wake of reduced transactions.

Fintech Revolutionizes Alternative Investing for Advisors

https://www.caisgroup.com/articles/the-impact-of-fintech-on-alternative-investments

Written by:

Andrew Popp | Sr. Research Associate