Echoes: Why every market is linked to central bank decisions

Philippe Faget, a teacher, and private assets guru at VEGA Investment Solutions, discusses how the ECB paved the way for the growth of private assets in Europe following the GFC, and why environments that look ideal for everyone rarely last forever.

Looking back over the past 25 years, what moment feels most important for understanding today’s private assets landscape?

Philippe Faget (PF): For me, the crucial turning point was not actually the dotcom bust in 2000 or even the GFC in 2007-08. It was when the European Central Bank pushed policy rates into negative territory around 2014. That decision created an entirely new regime for investors, particularly in Europe. It wasn’t just another rate cut; it was a complete paradigm shift.

Suddenly, investors discovered that if they left cash in money market funds or bank deposits, they were effectively paying for the privilege. This was a shock, especially for institutions that had only ever known a positive-rate environment. It forced them to think differently about asset allocation, portfolio construction, and how to meet long-term return targets when the traditionally ‘safe’ part of the portfolio no longer offered yield.

Crucially, this environment accelerated the development of private assets. Pension funds, insurers and other long-term investors had to look beyond listed bonds and equities to generate the returns they needed, and private equity, private debt and infrastructure became central, not peripheral, in strategic asset allocation.

What did that moment feel like at the time, and how did it change behaviours?

PF: At the time, I had been working at ratings agencies Moody’s and S&P with a focus on alternative investments. From that vantage point, the move to negative rates was seen as a strong, proactive signal: central banks were determined to avoid deflation and support growth at almost any cost. Markets welcomed that. There was a sense of ‘free money’ for governments and corporates – even weaker credits benefited from ultra-cheap funding.

But the other side of the coin was more challenging: traditional savers and conservative institutions realised they were losing money in nominal terms on cash-like instruments. It was genuinely a new world for those used to clipping coupons without thinking too much about risk.

So, two things happened in parallel. First, a huge hunt for yield pushed investors into spread products and alternatives. Second, the role of private markets in portfolios became much more prominent. Private equity, private credit and infrastructure stopped being niche diversifiers and became key building blocks in long-term allocation policies.

But that’s only the first half of the story. The second half is about the GFC and the subsequent regulation. Tighter bank capital rules and stricter lending standards meant banks could no longer intermediate credit in the same way as before 2008. That gap in financing created space for private credit managers to step in.

So, you had two forces at work: negative rates pushing investors towards higher-yielding assets, and regulation pushing lending activity away from banks into non-bank channels. Together, they created a golden decade for private credit and private equity, characterised by lots of liquidity, low rates, relatively benign macro conditions, and limited geopolitical stress. Before Covid struck, you could almost call it a utopia for private markets.

Today, we are in a very different regime. Interest rates are higher, geopolitical risk is back, and investors are more cautious on leverage and exits. That is where the echoes from past crises become useful: they are a reminder that environments that look ideal for everyone rarely last forever.

Which areas of private markets show echoes from past cycles, and which parts feel new?

PF: The echo is that periods of abundant liquidity and low rates inevitably lead to some excess. Before 2008, it was subprime securitisation and highly leveraged structures in public markets. Before Covid, in private markets, we had very generous financing terms, high valuations, and a belief that capital was always available at low cost.

Today, the macro backdrop has changed. Money has a cost again. That means private equity must focus more on genuine value creation, not just financial engineering. Buying a company with cheap debt and relying on multiple expansion is much harder when financing is expensive and buyers are more selective on exit.

And exits are more difficult, especially through IPOs or sponsor-to-sponsor deals at high valuations. That’s why we see more continuation vehicles, GP-led secondary processes and evergreen structures. Put simply, managers are trying to create liquidity when listed markets won’t provide it easily.

But also, private debt is facing a new test, especially in markets with weaker covenants, higher payment-in-kind usage and looser structures. Europe and the US differ significantly in this regard –European private credit has generally retained tighter covenants and more discipline, whereas parts of the US market look riskier.

What feels new is the combination of higher rates, geopolitical fragmentation, and heavier use of non-traditional liquidity mechanisms like NAV finance and continuation funds. It’s a more complex puzzle than simply describing it as ‘too much leverage’ or too much securitisation, as in previous cycles.

How are private market participants adapting? What has to change in sourcing, structuring and exits?

PF: In sourcing, the bar has risen. With higher rates, not every deal can absorb the cost of debt. Managers must look for businesses with strong pricing power, resilient cash flows and clear levers for operational improvement. The days of buying average assets at high multiples and hoping the macro environment lifts all boats are over.

In structuring, there is a renewed focus on sensible leverage levels and covenants, cash interest coverage, and realistic exit assumptions. On the last point, exits, there’s no doubt that investors have become pickier. High-quality assets can still transact at good multiples, but weak or over-levered companies find it harder to exit.

That’s where continuation funds and evergreen vehicles come in: they can provide more time for value creation, or interim liquidity, without forcing a sale into an unfriendly market. Used well, these tools can be positive; used carelessly, they can hide problems and delay necessary corrections.

Less experienced investment professionals might only really know the post-Covid era, learning about the GFC from textbooks. How important is lived experience and understanding that markets move in cycles?

PF: Education is the starting point – understanding monetary policy, business cycles and financial history. Everything in markets is ultimately linked to central bank decisions and the macro environment. So, a strong grounding in economic literature is essential.

But beyond theory, talking to people who lived through past crises is invaluable. Markets are full of financial innovation and complexity; history shows how the same mistakes can reappear in new forms. Think of investors buying AAA tranches of securitisations in 2007 without really understanding the collateral. Today, you could make similar mistakes in complex private structures if you don’t lift the bonnet and see what’s inside.

So, my advice to younger colleagues is to be humble – remember you are investing other people’s money. And only invest in products you genuinely understand. Also, learn from the big failures – Enron, Madoff, subprime, corporate collapses. Use them as a checklist of red flags.

I also teach at universities and business schools, and a big part of my courses is going through major defaults and frauds from the last 20 years. The aim is to build that instinct: when you see certain patterns, your alarm bells should ring.

Looking ahead five to ten years, what might we regret or wish we had done differently in private markets?

PF: One concern is the rapid growth of very large private debt funds, especially in markets with lighter regulation. When you see individual private credit funds of 20 billion dollars or more, with huge dry powder, and at the same time looser oversight of some mid-sized banks that originate loans, you worry about incentives.

We definitely do not want to recreate an unregulated shadow banking system that replicates the worst of pre-GFC excesses in a new form. Banks today are much better capitalised, their risk processes are stronger, and regulation has improved at the core. But if a large, loosely regulated private debt ecosystem grows around them, the systemic risk could simply migrate rather than disappear.

Another point is valuation and fair value, especially in evergreen and semi-liquid private market products. If investors are offered frequent liquidity against assets that are inherently illiquid, fair value assessments must be robust and transparent. Otherwise, early redeemers may be subsidised by long-term holders, or valuation gaps may only be exposed in stress scenarios.

For asset owners deciding how much to allocate between public and private markets today, what one or two lessons from the last 25 years would you emphasise?

PF: First, stress-test your assumptions. Distribution patterns in private equity, for example, have shifted: average distributions today can be significantly lower than historical norms, at least for some recent vintages. If an asset owner has built a programme assuming a certain pace of cash returns that doesn’t materialise, it creates funding and allocation problems. So, stress scenarios around distributions, valuations and exit timing are essential.

Second, develop a truly consolidated view of risk across public and private holdings. That means using consistent metrics, adjusting for smoothing effects, and building models that can show how the overall portfolio behaves under different macro scenarios – rate shocks, recessions, geopolitical events. This is not trivial; public and private assets are different animals, and you need financial engineering, good data and specialist tools to compare them properly.

Third, maintain a very strong due diligence process. As private markets become a larger slice of institutional portfolios – often 10-15% or more – the impact of mistakes is magnified. Diversification across GPs, strategies and vintage years, combined with deep qualitative and quantitative analysis, is critical. And be clear with clients and stakeholders: private assets are not ETFs. There is no magic liquidity. If expectations are mis-set, and investors have a bad experience, the damage can last a long time – for them and for the whole industry.

Many commentators have described today’s environment as unusually uncertain – even unprecedented. Do you see this as a uniquely unstable period, or just part of a broader cycle?

PF: A year ago, my answer would have been more optimistic: I would have said regulation had made the system safer, banks stronger, and ESG a core part of financial stability. But recent developments –especially deregulation trends following the re-election of President Trump – have changed the picture.

We now see signs of deregulation in US banking and some environmental standards. It’s a world that’s becoming more fragmented, with Europe, the US and Asia moving towards different standards and strategic priorities. And there’s clearly intensifying competition and tension around AI and technology leadership.

So yes, uncertainty is high, and the global order is shifting. But at the same time, many of the underlying dynamics are familiar: cycles of regulation and deregulation, innovation and excess, integration and fragmentation. AI is a genuine game changer, with major benefits in health, finance and many sectors – but it also increases the importance of how people access information and educate themselves. That will be a central issue for years to come.

Overall, I remain positive, but with a clear recognition that this is a new phase of the cycle: one with more fragmentation, faster technological change, and a need for even better governance, education and risk management.

Interviewed in November 2025