The Optimal Environment for PE

Private equity as an asset class has done fairly well over the past decade - I think that’s a fair statement. Even amongst a lot of competition and (clichè, sorry) ‘frothy’ M&A valuation multiples, a quick google search reveals that the asset class as a whole has managed to generate most investors around a ~15% IRR, not bad.

However, one could argue there were several factors that served as a catalyst for the asset class:

1. Cheap debt
2. Liquid capital markets - ability to lever up
3. Multiple expansion / relatively rapid price appreciate in the public markets
4. Historical returns data reflected well, investors may have seen it as a consistently performing asset they could utilize at the farther end of their risk curve.

My point is that I view the above as sort of the ideal environment for private equity as an asset class. It appears to me that if we begin to enter an era where one of those factors begins to unravel (stagnating equity markets, inability to ‘lever up’ as much at aggressive rates, etc.).. that private equity would struggle.

Am I right in that assumption? Although it doesn’t appear like there’s too much trouble yet, should those recruiting for PE be aware that many newer funds, or those that made investments late cycle, are more vulnerable than their managers think? Just wondering if this is obvious, or if there are some more potential factors I’m missing. Thanks