A paradigm shift happened in 2022, as the Fed ended years of loose money. Massive asset-price dislocation has created distressed, buyout, and carve-out opportunities for PE investors. But we believe these opportunities will now be more difficult to exploit. We discuss a framework that can generate sustainable potential alpha in the long run.

Key Takeaways

• A paradigm shift happened in 2002, as the Fed ended almost 15 years of loose monetary policy. Private equity has weathered the ensuing financial storm well on a relative basis. But we see both short- and long-term implications of this paradigm change on PE investing.
• In the short- and medium-run, the extensive dislocation in asset prices has rendered capital structures of many corporations inadequate for the new economic environment. We expect many will be forced to de-lever.
• As a result, we see opportunities in distressed situations as well as strong potential for take-private and carve-outs, as companies will be compelled to seek a buyer or divest non-core assets to shore up their balance sheets.
• Relative to other asset classes, PE tends to outperform in times of volatility, and some of the best private equity vintages have emerged during economic and market downturns. Selectivity, however, is paramount.
• The consequences of the paradigm shift for the long run are also key. With tailwinds of steadily rising multiples removed, opportunities in PE will likely become more difficult to exploit. We discuss a framework that can generate sustainable potential alpha in PE investments.

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