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Home > Financial Services > Rising interest rates seen causing asset managers to recalibrate

Rising interest rates seen causing asset managers to recalibrate

Dec. 13, 2018 by Jason Kuruvilla and Anthony DeCandido

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Interest rates risingPolicymakers believe the economy is on a strong footing, but the pace of rate increases going forward remains uncertain, and the effects on asset management could be significant. The Federal Open Market Committee is set to meet on Dec. 19, and an interest rate increase of 25-basis-points appears to be 75 percent likely, according to Bloomberg analysts. Meanwhile, there is just a 3 percent chance of another increase during the Jan. 31 meeting. Federal Reserve Chairman Jerome Powell cited slowing demand abroad, fading fiscal stimulus and the lagging effect of the Federal Reserve’s several rate increases on the economy since 2015 as possible headwinds.

Trade tariffs bring substantial uncertainty to the markets as well, as companies reinvent their supply chains to preserve profit margins. Rising interest rates call into question how investors will deploy capital and could create a sell-off for asset managers who prefer safer assets. Fixed income and credit products are likely to grow in popularity; the three-month Treasury yield has outperformed the S&P 500 dividend yield since the second quarter of this year. In the first nine months of 2018, real assets, real estate and debt are additional asset categories that have attracted more capital from investors than they did during the same period in 2017.

Higher interest rates will pinch private equity returns, but a significant de-escalation in mergers and acquisitions (M&A) activity is not imminent. Private equity (PE) firms often fund the takeover of companies using debt. Over the last several years, these firms have benefited from historically low interest rates and have generated high returns, beating the S&P 500 Index by a compound annual rate of return of 5 percent. Returns are likely to decline and PE-owned companies will focus instead on maintaining steady cash flow to service their increased borrowing costs. Firms looking for acquisitions will benefit from declines in pricing, while the opposite will be true for sellers. Approximately $1.1 trillion of commitments remain available for deployment, and a 25 basis point or greater increase in rates is unlikely to decelerate M&A volume.

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About Jason Kuruvilla

@JasonKuruvilla1

Jason is a partner and financial service professional from RSM’s Chicago office, aligned with the tax practice. He works primarily with clients in the financial services industry and has particular expertise in meeting the needs of hedge funds, fund of hedge funds, broker-dealers, private equity firms, commodity trading advisors, commodity pool operators, proprietary trading groups, family offices, private foundations, and high net worth individuals.

For the last 13 years, Jason has provided tax services for his clients in a variety of areas such as individual tax planning related to tax reform, review of partnership allocation methodologies, partnership/family office restructuring, IRS and state tax audits, industry related tax research, trading strategy reviews for optimal character recognition, foreign reporting issues, and overall federal and state compliance and planning.

Jason has worked with and counseled start-up funds, working alongside attorneys, administrators and prime brokers. In January 2018, Jason was selected as a senior analyst in RSM’s cutting edge Industry Eminence Program, which positions its senior analysts to understand, forecast and communicate economic, business and technology trends shaping the industries RSM serves. These senior analysts advise clients on conditions impacting middle market leaders. Jason’s focus is the financial services industry.

About Anthony DeCandido

@adecandido1

Anthony is a Partner at RSM US LLP with over thirteen years of experience at the firm. He serves as the Connecticut Financial Services Leader and his client responsibilities includes private equity funds, including those with multiple co-investment vehicle arrangements, hedge funds, fund-of-funds, real estate investment companies and asset lending businesses.

In January 2018, Anthony was selected as a senior analyst in RSM’s cutting edge Industry Eminence Program, which positions its senior analysts to understand, forecast and communicate economic, business and technology trends shaping the industries RSM serves. These senior analysts advise clients on conditions impacting middle market leaders. Anthony’s focus is on the financial services industry.

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