Private equity can no longer rely on borrowing cheap money to fuel returns, and will have to go back to its roots of sourcing good deals and making operational improvements, according to the head of Goldman Sachs’s investment business. “Private equity will look different over the next 10 years than it looked over the past 10 years,” said Marc Nachmann, global head of asset and wealth management at the US bank, in an interview. “It will be a little bit back to the future in a sense.”
The decade and a half of low interest rates that followed the 2008-2009 financial crisis heralded a boom in private equity, as managers made use of cheap and plentiful debt to embark on acquisition sprees. Falling interest rates raised asset values and cut the cost of capital.
“Over the past 10 years you could rely on lots of leverage, cheap cost of capital and multiple expansion, and you made your returns that way,” said Nachmann. “That will be harder to do going forward.”