Navigating Private Markets – June 2022 Release

June 2022

Private debt in rising inflation and interest rate cycles

Across most developed and emerging economies, inflation has surged well above central bank targets. In the last twelve months to May, consumer prices rose to 8.6%, 8.1% and 9.1% in the US, the EU and the UK . There is a growing concern that inflation may become persistent, fuel inflationary expectations, and lead to higher wage pressures that could push up inflation higher and for a sustained period.

Markets have reacted to this situation by pushing up interest rates. During periods of rising interest rates, fixed income investors are at risk of losing money due to the impact that higher discount rates have on their portfolios. They often react to this environment by reducing the duration (interest rate sensitivity) of their portfolios via the derivatives market or by reallocating their portfolios into short term bonds or the money markets. Private debt can help investors navigate a rising rate environment due to its floating coupon and the senior position on the capital structure of direct lending strategies.

Return generated by senior loans during periods of accelerating inflation in the Eurozone
Return generated by senior loans during periods of accelerating inflation in the USA

Note: Past performance is no guarantee of future returns.

Source: S&P, Federal Reserve Bank of St. Louis

Coping with the Cycle through vintage diversification

Markets may endure volatility and severe corrections over the next few years. This will represent a challenge for existing mature funds planning to exit their investments and a great opportunity for new funds.

New funds deploying cash over the next few years through multi-year investment programs will be able to seize unique investment opportunities and harvest outsized illiquidity and complexity premia.  

Year and Share of Investments – Direct Funds

Source: Based on all primary private equity comingled funds invested by Altamar Private Equity, S.G.I.I.C., S.A.U. since 2005.

Year and Share of Investments – Funds of Funds

Source: Based on all primary private equity comingled funds invested by Altamar Private Equity, S.G.I.I.C., S.A.U. since 2005.

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