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Private equity outperforms private credit in Q3

Private equity (PE) returns surpassed those of private credit in the third quarter of last year, signalling a potential longer-term rebalancing between the two investment markets, according to a report by Bloomberg citing data from State Street.

For the period ending 30 September, PE funds posted a 3.09% return, slightly outpacing the 3.06% return of private credit funds. This marks a reversal after PE underperformed its debt counterpart for much of the past two years.

A combination of factors is contributing to this shift, including a pickup in buyout activity, lower interest rates, and narrowing spreads on private debt, driven by heightened competition among lenders.

Nan Zhang, Head of Product Implementation and Alternative Investment Research at State Street, noted that if inflation remains controlled and buyout performance recovers, the current trend of private credit outperforming may reverse.

PE returns began to climb as exit conditions improved due to lower interest rates and growing expectations of regulatory rollbacks under the Trump administration. Looking ahead, further interest rate cuts could limit returns for private credit, particularly for deals with floating interest rates. At the same time, many market participants are optimistic that rate cuts could fuel a surge in buyout opportunities for private equity firms.

Investors have already started shifting allocations towards PE strategies, with iCapital, a marketplace for alternative assets, noting a growing preference for PE over private debt. iCapital CEO Lawrence Calcano suggested that the move reflects a bet on lower rates and a more favourable environment for IPOs in the future.

Despite the rise in private equity returns, private credit continues to attract significant investment though. Ares Management, one of the largest players in the private credit space, is raising billions for strategies globally.

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