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June 19, 2007 The Beginning of the End of the Private Equity Run?
For years private equity firms have enjoyed cheap money and low interest rates, which they have used for countless deals and unprecedented success. However, concerns about rising rates in the Treasury bond market are raising worries. Could this be the beginning of the end of the cheap money cycle so imperative to their success?
On June 12 the yield on the benchmark 10-year Treasury note reached 5.25 percent, its
highest in the last twelve months, up from 4.67 percent the previous month. This increase in bond yields has fueled worries that it will be more difficult to borrow money going forward. Large investors, such as pension funds have invested billions in private equity in search of high yields. But now some of these investors may reevaluate where the opportunities really are and in turn slow the amount of money flowing through private equity. Rising borrowing costs could also put pressure on private equity at a time when there is already concern over the high prices being paid for deals. However, notwithstanding the possible slowdown, most analysts agree that while credit may start to tighten, it will take much more than a gradual increase in interest rates to derail private equity.
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