Question

How is the level of private equity fund-raising correlated with the public markets? Why is this the case?

Answer 1

The level of private equity fund raising is positively correlated with public markets during the times of economic crisis as witnessed during the financial crisis of 2008. This is due to the fact that during financial crisis, there was an environment of risk aversion and as a result most of the companies refrained from raising capital in the public equity markets as they had indication they won’t be successful in raising good amount of capital. Similar sentiment also existed for private funds and it was difficult for private equity fund raising also due to an existence of overall sentiment of risk aversion.

During the post crisis period, the central banks followed an easy monetary policy which meant that lot of investment was recorded in the public equity market. The same phenomenon also meant that private equity fund raising also become easier due to existence of liquidity and low interest rates. Thus a positive correlation existed in the post crisis period as well.