In December 2023, Apollo Asset Management Co-President Scott Kleinman made a bold prediction that he would be betting against any rate cuts in 2024. This contrarian view has proven to be successful so far, with Kleinman standing by his decision. Despite the market’s anticipation of multiple rate cuts, he remained steadfast in his belief that rates would not be going down.
While higher interest rates may not have been welcomed by all, especially within the private equity industry, Kleinman’s perspective sheds some light on the potential benefits. The increase in financing costs as a result of higher rates has posed challenges for buyout deals. According to a report from Bain & Co., the buyout deal count in the year through May 15 is down 4% globally compared to the previous year. This decline in activity has left a significant amount of dry powder – $1.1 trillion – within buyout funds that needs to be deployed.
Despite the hurdles faced by the industry, Kleinman expressed his confidence in the current interest rate environment. He stated that Apollo Asset Management has been one of the few private equity firms hoping for higher rates for many years. This unique perspective is rooted in their value-oriented investment strategy, which thrives in conditions where corporate valuations are more disciplined. With higher rates, there is a greater emphasis on finding undervalued companies and negotiating reasonable valuations.
As for Kleinman’s current stance on interest rates, he remains optimistic about the potential opportunities that higher rates can bring. He believes that the increased value discipline imposed by rising rates will lead to more attractive investment prospects. Despite the challenges and uncertainties surrounding the global economy, Kleinman sees higher rates as a chance to uncover valuable assets and drive growth within the private equity sector.
Apollo Asset Management’s unique perspective on interest rates highlights the diverse viewpoints within the private equity industry. While higher rates may pose challenges for some, others see it as an opportunity to exercise value-oriented investing and unlock hidden potential in the market. As the global economy continues to navigate through fluctuating interest rates, firms like Apollo Asset Management stand ready to adapt and thrive in the evolving financial landscape.