Private Equity Finally Gets the Interest Rate Decrease It Has Been Waiting For – but Will It Move the Needle?

On September 18^th, you could almost feel the sense of relief (joy, even) in the alternative investment industry that the U.S. Federal Reserve cut interest rates for the first time since the onset of the Covid-19 pandemic in March 2020.

Good news all around, especially for those in private equity. Lower rates equal a lower cost of leverage, which equals more money to fund deals.

But how much difference will it make in the short term?

If you’re a pessimist, then not a great deal, in all likelihood. A 50 basis points decrease, while very welcome, still keeps the prevailing interest rate at levels as high as they have been since before the Global Financial Crisis, so leveraged loans will still be expensive when compared to the halcyon days of the ZIRP era of 2009 – 2016.

And defaults on leveraged loans are expected to remain at around 1.5% through June of next year; that the default rate has been increasing generally in the past couple of years likely means a continuation of the cautious approach to deals undertaken by private equity firms, something that has been a recurring theme in the recent higher interest rate and inflationary environment.

But if you’re an optimist, then you would likely have a different outlook. A 50bps reduction is still a 50bps reduction, right?

And then there is the elephant in the room. And from a capital perspective, elephant might be an appropriate analogous term: According to S&P Global, private equity dry powder growth accelerated in the first half of this year, holding a record $2.62trn of uncommitted capital, adding almost $50bn to the pot since December 2023.

To provide perspective, if all of that money was called and deployed before the end of 2025, the total value of that deployment would be 2.5 times the aggregate value observed in 2021, which remains the industry’s current banner year, when around $1.2trn worth of deals were completed.

It will not all be deployed in the next 15 months, of course. But that money will need to find a home at some point, and while the recent rate cut will likely not cause an avalanche of deals to be concluded in Q4, it could well be the spark that ignites the next great private equity bull run – which could really pick up steam in 2025 if the U.S. Fed reduces rates even further in November or December, something that interest rates traders are currently pricing in with 100% certainty – the only difference of opinion being whether the cut will be 25bps or 50bps.

**********

Anthony D. Mascia is Managing Partner at EFSI. Connect with him on LinkedIn here.

EFSI is an independently owned, SOC-1 compliant, full-service fund administration firm. We provide accounting, reporting, administrative, and capital introduction services to a wide range of alternative investment funds including hedge funds, funds of funds, private equity funds, real estate funds, venture capital funds, and family offices. The center of EFSI’s service incorporates resilient technology and accomplished staff, providing clients a tailor-made service with exhaustive transparency. Give us a call today or reach out to our support team online. We look forward to hearing from you soon.