Jacques Henry, Head of Equities, Pictet Wealth Management.

Are rising yields jeopardising Private Equity?

1. Private-equity returns were broadly flat in the first quarter of 2022 (latest data available), dragged down somewhat by venture capital (VC).
2. The current innovation wave is fading and funding conditions are deteriorating, putting downward pressure on VC returns similar to that on the Nasdaq.
3. During market crises, private equity tends to decline less than listed equities.
4. Given generally rising bond yields, we expect the average interest rate paid to fund buyouts to converge toward the long-term average of 6.3%, slightly above the current 6%. In other words, we do not see the current rise in interest rates as a game changer for buyouts’ performance.
5. At end-June 2022, the valuation of buyout deals measured by EV/EBITDA (Enterprise Value / Earnings before Interest Taxes Depreciation and Amortization) for global private equity stood at 12.7x. The potential valuation derating ranges between 5% and 10%.
6. Based on historical drawdown analysis, we expect VC to have recorded returns in the region of -12% to -15% in Q2 2022 and buyouts in the region of -10%.
7. Our 10-year expected return for global private equity stands at an annual average of 9.2% (in USD), i.e. a 3% return premium over the MSCI AC World index.