Why a Fed rate cut could boost private equity dealmaking after IPO logjam
The backdrop for private equity exits is turning more favorable — and a Federal Reserve rate cut could give dealmaking activity more momentum. Investors are firmly focused on the Fed’s rate-setting Federal Open Market Committee, which is predicted to lower borrowing costs by a quarter percentage point at its latest meeting on Wednesday, bringing the benchmark rate to between 3.5% and 3.75%. A decision is due at around 2 pm ET. Michael Bruun, global co-head of private equity at Goldman Sachs Alternatives, said a lower overall cost of capital is one of several factors — along with the reduction of credit spreads, lower volatility, and a stabilization of valuation — which are shaping a better outlook for private equity. A third straight cut from the Fed would reinforce the downward trend in financing costs, potentially enabling greater use of leverage among private equity shops and strengthening the nascent pick-up in dealmaking in both corporate M & A and public market exits. “We have a very constructive outlook for private equity now and into 2026. If you look at global M & A right now, we are up almost 40% year-to-date,” Bruun told CNBC’s “Squawk Box Europe” on Wednesday, pointing to an acceleration in the second half as volatility has receded. “We are absolutely on an up right now in private equity,” he added. The end of zero interest rates in 2022 brought IPOs and M & A activity — a key exit strategy for the private equity sector — to an abrupt halt . But a fresh rate cut on Wednesday could lift such exit prospects, according to Bruun. “We have to accept that the overall balance between public and private markets has shifted over the past few years, and there’s a lot more opportunities to stay private for longer,” Bruun said, adding that equity markets have become much more selective around public debuts. “Having said that, it does feel like a more constructive environment for public markets. Companies with large intrinsic value, companies that are strategic in their sectors, are still receiving a lot of interest, and as rates come down, we see an opening of the IPO market,” he added. He continued: “We remain constructive on the IPO market as an exit route, but we think it will represent a smaller portion of the overall exit formation versus a decade ago.” Broad-based opportunities Bruun said that corporates were driving an increasingly larger share of private equity exits, where companies are becoming “very deliberate” in their dealmaking, shedding non-core assets which open attractive carve-out opportunities for private equity companies, while also pursuing larger, strategic transactions. He said there was a “very large backlog of unharvested assets”, including in Europe, where there is $1 trillion of assets with a lifetime of more than six years, “all of which needs to get transacted over the coming quarters.” That pipeline, he said, supports “a benign outlook in terms of deal formation… We think that that backlog is really starting to move.” A more constructive exit environment could help further unlock distributions for private equity limited partners — and another Fed rate cut could ultimately provide an added sweetener for this improved backdrop. Bruun gave financial services, healthcare, technology and business services as examples of sectors benefiting from secular growth trends. Many of these areas, he added, are “in flux right now and where there is good value to be made.” Regarding AI, he said there were opportunities beyond large language models, such as AI implementation among corporates. “Are you an IT services company that can help other companies in implementing AI? Are you an energy company, where you are helping building out the energy infrastructure? These thematics are very broad-based,” he said.
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