Private equity must go 'back to the future'

THE end of the cheap money era means private equity will have to go "back to the future" to ensure they make returns, a Goldman Sachs executive 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 $4.7 trillion 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 suggested that private equity could return to how it previously worked, when it focused more on targeting underperforming divisions and making major internal improvements.

(c) 2024 City A.M., source Newspaper