Private equity fund performance dropped in the third quarter of 2021, after a strong showing earlier in the year, as soaring inflation and higher interest rates began to have an impact.

A tighter policy environment is putting downward pressure on risk assets and causing PE returns to normalize after several standout quarters driven by ultra-loose fiscal and monetary policies, according to PitchBook's latest Global Fund Performance Report.
   

In Q3 2021, global PE fund returns dropped to 6.8%, the strategy's lowest quarterly IRR since the pandemic rocked public markets in Q1 2020, according to the report. Returns dropped across all funds regardless of region, but analysts did see greater resilience out of Europe and funds sized under $500 million.

Despite the dip, PE funds beat the quarterly returns of the S&P 500 and STOXX Europe 600 in Q3. Returns are still above PE's five-year quarterly average, according to the report.

Preliminary data for Q4 shows that further declines may soon follow and analysts expect variation in returns among managers. Analysts also anticipate that competition will continue for assets that are indispensable, have considerable pricing power or are unaffected by European geopolitical tensions.

Read more: 2022 Global Fund Performance Report

Featured image by sakchai vongsasiripat/Getty Images

This article originally appeared on PitchBook News