The announcement of Fed tapering has boosted financial market volatility and high-yield spreads. This is an important development for private equity because debt markets are a major driver. However, historical patterns suggest that this spike may be a temporary phenomenon during which markets are weaned off the liquidity glut.
Over the medium term, monetary normalisation should be associated with stronger risk assets and better prospects for private equity. This is not because private equiteers would cheer a cut in liquidity supply. Instead they would cheer the underlying economic improvement that would allow cutting liquidity in the first place. [more]