Over the past two years, higher interest rates have dampened activity in private capital, creating a challenging environment despite resilient performance. As we approach the end of 2024, sparks of life are emerging, fueling optimism for improved liquidity and a revitalized market landscape.
The clouds are slowly abating after the surge in interest rates driven by the Fed’s aggressive rate hike cycle cast a shadow over private markets. However, the era of easy money—and the investment trends it propagated—appears to be a relic of the past. As we enter the home stretch of 2024, policy is set to loosen further and the economy remains healthy, but growing uncertainty and higher-for-longer interest rates will test the timing and shape of renormalization. We discuss key trends in private equity, private credit and commercial real estate in this our inaugural Private Markets Outlook.
Key takeaways
- Rising interest rates have slowed the velocity of capital over the past two years. As rates decline and valuation gaps narrow, private markets look to have traversed the worst of this slowdown.
- Performance across private equity and private credit has remained strong, owing to the impressive resilience of the U.S. economy and fundamentals of middle market firms. Performance of private real estate has been highly dependent on property type and position in capital structure.
- We expect signs of recovery in broad deal activity to become apparent in early 2025, though the bounce may take a different shape than some expect. Liquidity will remain a pain point for LPs, calling for secondaries to be a mainstay in private market portfolios.
Private equity outlook
In our view, the remainder of 2024 is poised to be a period of reorientation. Ample dry powder sits ready for deployment and unrealized value awaiting exit is at all-time highs. As Q2 showed, even modestly cheaper financing can spur activity, providing a bullish impulse for activity in late 2024. However, a durable rebound in deal activity may require further confidence that lower financing rates have some permanency. The market has moved in that direction, as forecasts for rate cuts have climbed to 250 bps by year-end 2025. Still, we expect the Fed to be methodical as long as the economy remains resilient and inflation data bumpy.
Private credit outlook
In 2023, higher base rates increased yields in private credit but also reduced private equity deal activity and related financing demand. With economic uncertainty elevated following the spring bank failures, competition from public markets was low, allowing private lenders to reap wider spreads. Deal activity in 2024 has remained lukewarm but economic confidence has improved, catalyzing issuance in the syndicated loan market. The result has been a tightening in credit spreads across public and private markets
As the Fed begins to reduce its policy rate, questions have rightly arisen about the impact on returns for private credit. Importantly, investors should consider returns on a real – not nominal – basis. If the Fed reduces rates by another 150 bps by mid-2025 as the market expects, a private credit nominal yield of 9%–10% would likely imply a real yield of 7%–8% – higher than in 83% of cases throughout the market’s history. In all, while rate cuts would likely reduce yields in the private credit market, we reject the notion that it would make the market less attractive for investors.
Private real estate outlook
The U.S. commercial real estate market remains in a correction that began more than two years ago, when it became apparent the Fed would drastically raise rates to combat inflation. The rapid increase in financing costs drove a wedge between buyers and sellers, forcing the market to find a new valuation equilibrium. More recently, we’ve seen signs of life in the market, including stabilization of property values and a recovery in CMBS issuance, but a discernible rebound in transaction activity has been elusive.
Broadly speaking, we see the CRE market heading in the right direction, but any recovery will be uneven. Two of the key challenges for the market – elevated rates and a surge of new supply – are improving, while the third – fundamentals in the office sector – remains a thorn in the market’s side. Risk premia in CRE have remained tight relative to rates throughout this correction, restricting upside for property values in the short- to medium-term. We see a gradual improvement in market activity while returns are generated primarily via income.
