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Macro Update: Rising Rates = PE Bid-Ask Spread = Decreased Distributions

Macro Update: Rising Rates = PE Bid-Ask Spread = Decreased Distributions

What Happens When You Rely on Financial Engineering

Matthew Podlesak
May 25, 2024

Macro Update: PE Buyer / Seller Bid-Ask Spread Curbs Distributions Driven by Rising Rates

Wishing everyone a happy Memorial Day Weekend. If you find yourself Talking Shop with family and friends… here are a few talking points for you.

Let’s do a quick macroeconomic update on how rising rates have led to a bid-ask spread that is curtailing PE asset exits and LP distributions.

If you read nothing else after this…

Heightened interest rates + unrealistic internal valuations by PE firms = bid-ask spreads on PE assets = decreased exit activity = decreased distributions to LPs

This is a poignant reminder of why its so important to invest in PE managers who are disciplined buyers and secure attractive entry pricing.

You can’t count on multiple expansion… or even exiting at your entry multiple.

Going forward… its critical to invest behind GPs who drive true alpha through growth and profitability value creation.

You can’t count on financial engineering and rising tides to raise your boat.

How Rising Rates Has Created a Bid-Ask Spread that is Curtailing Exits and Distributions to LPs

Rising Rates Theoretically Should Decrease the Intrinsic Value of an Asset
- The value of a business = the present value of future cash flows at a certain discount rate
Some PE firms are holding assets at valuations are unrealistic and unattainable, especially after the rate hikes
The unwillingness to crystallize normalized valuations for certain assets is creating bid-ask spread inhibiting deals from getting done
- This is despite record amounts of dry powder and a multitude of buyers looking to deploy this capital
Without PE exits, many LPs are itching for distributions (a lot more we can talk about here… continuation funds, secondaries, etc.)

Chart 1: Federal Funds Rate at All Time Highs Since Global Financial Crisis

Chart 2: Private Equity Asset Bid-Ask Spreads Are Curtailing PE Exits

Chart 3: Private Equity Distributions to LPs Have Meaningfully Declined

More to come when we next Talk Shop…

How value creation has looked historically for PE deals (e.g. revenue growth vs. margin expansion vs. multiple expansion vs. debt paydown)…
…and what we are prioritizing when underwriting managers for the new PE environment
Hint: you can’t count on cheap leverage and multiple expansion… you need managers who drive alpha through optimizing growth and profitability

At Gather Capital, we strive to curate a set of world class alternative investment opportunities that enable our clients to invest alongside sophisticated institutional limited partners.

We are investing into a wide range of opportunities from:

multi-billion dollar sized funds from blue-chip firms with multi-decade track records of top tier returns…
…to sub-billion dollar sized funds led by highly sought after emerging managers.

If you’re interested in learning more about what we do, feel free to: