[tdullien]

"it depends" - but there are several components at play:

PE benefited greatly from a long-term decline in interest rates. The amount of debt a company can service at a given profitability is directly related to the current prevailing interest. So as long as interest rates drifted down, PE firms could buy, load with debt to be paid out as dividend, and sell again, sometimes to the next PE buyer.

Secondly, banks will not hold this debt directly on their books, but either sell bonds directly (the low interest environment led to some life insurers and other long term investors to buy pretty risky corporate debt) or repackage them with (hopefully) uncorrelated debt to obtain better ratings (price).

There's an argument that the success of PE funds had everything to do with them being a macro bet on falling interest rates.

[JumpCrisscross]

> an argument that the success of PE funds had everything to do with them being a macro bet on falling interest rates

It’s incorrect. The leveraged buyout, for example, found its footing in the high-rate environment of the early 1980s.

[tdullien]

Doesn't that have more to do with Michael Milken pioneering junk bonds, which then vastly expanded the available credit?

As in: The fact that the 80s had comparatively high interest rates doesn't matter to the argument, as the necessary infrastructure to issue and trade high yield corporate debt quickly didn't exist - so in some sense effective interest rates dropped from infty to something, enabling the entire LBO model.

And since then, with the exception of the recent hiccup, the long term trend in interest rates has been downward?

What's your read?

[JumpCrisscross]

> Doesn't that have more to do with Michael Milken pioneering junk bonds

Capital was uniquely available in the 1980s. But Milken was a symptom, not the cause. The booming American economy provided the fuel, but digitisation turbocharged the engine: issuing, pricing and trading securities, in particular bonds, became easier very quickly. (This is why your stereotypical trader from the 80s has an accent and is uncouth. They replaced blue-blooded bankers who had run bonds, calculating prices and yields by hand using tables.)

Put another way, America is “unusually good at creating tradeable claims on the profits and revenues that its economy generates” [2]. Computers amplified that strength and prompted massive opportunities in reshaping the economy.

> with the exception of the recent hiccup, the long term trend in interest rates has been downward

Yes, this is a function of increasing stability and time horizons [1]. That said, the relevant frame is a fund lifespan, usually 5 to 10 years. (Unless you’re Warren Buffett.) In those intervals, the long-term signal is dwarfed by short-term noise.

[1] http://www.economist.com/news/finance-and-economics/21598651...

[2] https://www.bankofengland.co.uk/-/media/boe/files/working-pa...

[tdullien]

I haven't checked in depth, but ... while the Fed funds rate has oscillated a bit ("noise") the curve for 10- or 30-year t-bills or mortgages is much smoother, and newly issued junk bonds will track those more than the Fed funds rate.

And I'd be surprised if in the period between 1980 and 2021 you could find a 10 year interval that didn't exhibit significantly lower rates at the end than at the beginning, and only a select few 5-year periods.

You seem to have the viewpoint that this had nothing to do with the historical performance of PE funds?

[JumpCrisscross]

> this had nothing to do with the historical performance of PE funds

It had a strong effect. But it’s far from dominating. Compounding PE’s performance woes are that fundraising is easier when the economy is strong. That is why there has been a tendency of the largest LBOs happening just before a downturn; the last cycle’s was Twitter.