In December of 2023, Apollo Asset Management Co-President Scott Kleinman made a bold statement by going against the market consensus of predicting rate cuts. While many were expecting multiple rate cuts in 2024, Kleinman took a contrarian view and bet against it. Surprisingly, his prediction has been proven right so far, as rates have remained stable. However, the impact of higher interest rates has not been entirely favorable for the private equity industry.
Despite the absence of rate cuts, higher interest rates have posed challenges for private equity firms. Financing costs have increased, making it more expensive to fund buyout deals. As a result, the buyout deal count has been tracking down by 4% globally on an annualized basis compared to the previous year. This decline in activity has led to a surplus of $1.1 trillion in dry powder within buyout funds that needs to be deployed. The lack of investing opportunities has created a dilemma for private equity firms.
Scott Kleinman from Apollo Asset Management remains optimistic about the current interest rate environment. Unlike many other private equity firms, Apollo has been hoping for higher rates for years. Kleinman believes that higher rates force more value discipline on corporate valuations, making it easier to identify undervalued companies. This, in turn, leads to more attractive investment opportunities and reasonable valuations. As a value-oriented investor, Kleinman sees higher rates as a catalyst for finding promising investment prospects.
Looking ahead, Scott Kleinman’s perspective on interest rates remains positive. He expressed confidence in the current rate levels and emphasized the benefits they bring to private equity investing. By maintaining a disciplined approach to valuation, private equity firms can navigate the challenges posed by higher interest rates and identify lucrative investment opportunities. Despite the uncertainties in the market, Kleinman’s unwavering belief in the value of higher rates demonstrates a unique perspective within the private equity industry.