According to reports from KKR, the average effective fed funds rate between 1976 and 2023 was 4.66% compared to 3.35% over the past two years. It could be argued that rates are just returning to more normalized levels.
That shows what we perceive as "high" interest rates today are actually below historical averages. So, in a historical context, today's rates are not exceptionally high—they're merely returning to more normalized levels.
Additionally, leverage levels in digital health private equity are not as high as they once were. While higher borrowing costs do raise the bar for returns, private equity managers are now relying less on leverage than in the past.
Debt as a percentage of total capital structures reached about 60% in the past, whereas today, it's closer to 35%.
This decreased reliance on leverage enhances the resilience of private equity strategies in the face of higher interest rates.
Moreover, private equity managers have the flexibility to capitalize on inflationary shocks.
So, when interest rates rise, asset multiples tend to decline, presenting opportunities for private equity to acquire assets at discounted prices. Historical data shows that private equity has outperformed public equities during periods of market downturns.
This ability to weather market volatility underscores the strength of private equity strategies in mitigating the effects of uncertain economic environments.
Ad to finally put things in perspective, the success of private equity investments ultimately hinges on value creation rather than leverage.
That is why experienced private equity firms excel at identifying and partnering with promising companies, driving value through strategic initiatives such as mergers and acquisitions, operational improvements, and expansion into new markets.
By focusing on value creation rather than excessive leverage, private equity managers can generate compelling returns irrespective of interest rate fluctuations.
And while the prospect of higher interest rates may raise concerns among investors, it's essential to recognize that private equity strategies have inherent resilience and adaptability.
But with a prudent approach to leverage, capitalizing on market opportunities, and prioritizing value creation, private equity remains well-positioned to deliver attractive returns even in a challenging rate environment.
So, don't let interest rate fluctuations deter you— here at Enventure, we’ve got plenty of opportunities to propel you to success in your private equity endeavors