BIS study finds monetary policy dampens private equity activity
A new Bank for International Settlements (BIS) working paper finds that contractionary monetary policy dampens private equity activity. The study, published in January 2026, shows reduced deal volumes, leverage, and deal prices.
Short-end shocks hit PE deals
The BIS working paper reveals that contractionary monetary policy shocks, particularly those affecting the short end of the yield curve, significantly diminish private equity activity.
These shocks lead to a reduction in the volume of PE deals, a decrease in the use of leverage for acquisitions, and lower pricing for target companies.
The study identifies two distinct transmission channels: a credit channel, which primarily impacts deal volumes and the extent of leverage employed, and a valuation channel, which is the main driver behind the transmission to deal pricing.
Conversely, monetary policy shocks to the long end of the yield curve are found to have weaker effects on overall private equity activity, with their impact on deal pricing being negligible.
Private capital's growing role
The research contextualizes its findings within the broader trend of financial intermediation shifting from traditional banks towards non-bank financial intermediaries (NBFIs), particularly the booming private capital markets.
While previous studies have explored monetary policy's propagation through private credit funds, this paper fills a gap by focusing on private equity.
It builds upon earlier insights, such as the dependence of leveraged buyout capital structures on economy-wide credit conditions and the role of the equity risk premium in deal-making.
The authors enhance existing models with a more comprehensive dataset, including various types of private equity transactions, and integrate high-frequency monetary policy shocks to assess transmission.
Unpacking the shadow banking link
This study provides crucial empirical evidence on how central bank actions ripple through the increasingly vital private equity sector.
Its distinction between credit and valuation channels offers a nuanced understanding of policy transmission beyond traditional banking.
For regulators, these findings underscore the necessity of monitoring non-bank financial intermediaries more closely to ensure financial stability.