Interest rates are falling again, retreating from their recent plateau held from August 2023 to August 2024. The first cut of 50 bps occurred in September 2024, with another 75 bps reduction expected over the next 90 days. Last time rates were cut, starting in August of 2019 and continuing to a significant 150 bps cut in March 2020, public and private markets experienced a boom: the S&P 500 went from 2,300 in March 2020 to 4,500 by March 2022, an almost 100% gain. Private equity experienced a 52% gain in that subsequent two year period and private debt shot up 17%.

Recency bias can be powerful, but it likely shouldn’t be trusted. The post-COVID upswing should be seen as an anomaly. Fiscal and monetary policy levers were heavily leaned upon to ease the economic impact of a global shutdown caused by the pandemic.  

Let’s look further back. In 2007/2008, the Fed cut rates by 275 bps in less than a year in response to the global credit crisis. Over the next two years, private equity performance was -20% and private credit was -12%. Following rate cuts in 2000, on the back of the dot-com bubble, private equity performance was -18% for the next two years while private debt was +9%. Similarly, the S&P 500 fell 38% in 2008 and experienced double digit declines in each of 2000, 2001, and 2003 as seen in the below table.

With the shift in interest rates and the resulting impact on financial markets, historical data points to private credit outperforming private equity (and public equity) over the next 24 months. Private equity returns can be expected to fall double digits while public markets, in particular the S&P 500, should be expected to have a more pronounced drawdown.

Summary:

While private credit is expected to outperform through 2025 and into 2026, private equity funds who can execute on operational value creation, regardless of interest rate environment and economic uncertainty, should offset lagging performance.

In the next issue, we will look at AI’s contribution to value creation where the implementation of cutting-edge technology is expected to boost margins.