In December 2023, Apollo Asset Management Co-President Scott Kleinman made a bold prediction that went against the market’s expectations: he stated that he would be betting against any rate cuts in 2024. This contrarian view has proven to be successful so far, as rates have remained stable. Despite this, the higher interest rates have not necessarily benefited the private equity industry, as they have kept financing costs elevated.
According to a report from Bain & Co., the buyout deal count in the year through May 15 is down by 4% globally on an annualized basis compared to the already low activity seen in 2023. This lack of investment activity has resulted in a significant amount of dry powder, amounting to $1.1 trillion, sitting idle within buyout funds. This presents a challenge for private equity firms, as they need to find suitable investment opportunities to deploy these funds effectively.
Despite the challenges posed by higher interest rates, Apollo’s Kleinman remains “very comfortable” with the current rate environment. In an interview at the SuperReturn Conference in Berlin, Kleinman expressed that Apollo has actually been hoping for higher rates for many years. As a value-oriented investor, higher rates impose greater discipline on corporate valuations, resulting in more attractive investment opportunities and reasonable valuations. This allows private equity firms like Apollo to identify and acquire companies with strong growth potential at favorable prices.
Looking ahead, Kleinman’s positive outlook on interest rates reflects a broader trend within the private equity industry. Despite the challenges posed by higher rates, firms are finding ways to adapt and capitalize on the opportunities presented by the current economic environment. By maintaining a disciplined approach to investing and focusing on value creation, private equity firms can navigate the complexities of a changing rate environment and continue to generate strong returns for their investors.