The ‘Denominator Effect’ Depressing Private Markets: QuickTake

When prices of publicly traded stocks and bonds retreated last year in the face of rising interest rates and geopolitical tensions, institutional investors were forced to reduce their holdings of private equity and private credit. Funds dedicated to investing in private assets are now struggling to raise new money. This turn of events was triggered by something known as the “denominator effect” that reflects the risks from investing in these illiquid and often opaque markets.

1. What is the denominator effect?

In a diversified portfolio, when the value of publicly traded assets such as stocks and bonds drops, private investments ...