Private equity reaping pandemic windfall as US economy is hottest since 1984
Private equity firms are up 27 per cent this year, making them among of the best performing segments in the global markets so far in 2021.
Many private equity firms provided crucial financial assistance to their portfolio companies during the crisis months of the pandemic and, according to Peter Garnry, analyst and head of equity strategy at Saxo Bank, they are now reaping the windfall.
“Credibly benign financial conditions are also helping private equity firms to leverage their balance sheets. However, it is not all without risks as investors are paying the most on record for listed private equity,” he said today.
“It should not be a big surprise given the low interest rate environment and benign funding conditions for private equity firms, although on the downside the competition for deals has gone up significantly,” Garnry added.
US economy ‘hottest since 1984‘
Moreover, as of May, the US economy is operating at the highest activity levels since 1984, Garnry pointed out.
“The talk is all about inflation these days. While supply side effects are a big part of the current inflationary pressures, the demand side is also strong driven by fiscal stimulus,” he noted.
“Due to debt saturation in the economy, credit growth cannot be a meaningful amplifier of inflation in the developed world, so it must be direct stimulus from the fiscal side. But how big is the current stimulus?”
The broadest measure of the US economy is the Chicago Fed National Activity Index measuring 85 indicators on the US economy with positive values, meaning the US economy is growing above trend growth, Garnry pointed out.
The three-month average is currently 0.81 which is the highest since 1984, so the US economy is currently expanding at a rapid pace.
“This aligns well with estimates that the US economy by Q4 will operate well above its GDP potential which at that point will add further to inflationary pressures,” Garnry continued.
“The current macro indicators on the US economy also suggest that we will get a very strong Q2 earnings season which starts three weeks from now,” he concluded.