What buyout fever means for markets

Private equity is on a roll. November has seen unprecedented activity levels in the buyout market. Why is this? And what does it mean for bonds and equities?

Not so long ago a Swedish pension fund manager, who shall remain unnamed in order to protect his good name and reputation, stated publicly that "he was never going to invest in another hedge fund. Returns were simply not attractive enough. Going forward, he would concentrate his alternative investment allocations on private equity." Amen.

Earlier this year, the annual Cap Gemini World Wealth Report confirmed that the average high net worth investor harbours similar views. Allocations to hedge funds amongst private investors are dwindling whereas private equity allocations are on the rise all over the world. Now, with the risk of stepping on the toes of one or two of our clients, let's remind ourselves what we learned from the previous private equity cycle which came to an abrupt end in 2001-02. We learned that all the sales talk about private equity funds providing non-correlated returns was mumbo jumbo. Contrary to what we had been told, private equity behaved no differently from any high-beta (i.e. highly volatile) listed stock.

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