The Impact of Higher Interest Rates on Private Equity

Increased interest rates have undoubtedly made the private equity landscape more complex and challenging.

Leveraged buyouts, a common PE strategy, and high interest rates do not go hand in hand. With the increased borrowing costs, LBOs are significantly more expensive, making it harder to achieve the high level of returns that LPs expect. As a result, many PE firms are re-evaluating their investment strategies and deal structures to adapt to the new economic environment.

The increased cost of debt has also led to a slowdown in deal activity. According to a report by Bain & Company, global PE deal volume fell by approximately 15% in the first half of 2023 compared to the previous year. Blackstone, as one example, has reportedly pulled back on several potential acquisitions due to the higher borrowing costs and uncertain economic outlook. Deal slowdown can also be attributed to uncertainty in the market and the fact that some GPs have had their hands full with existing portfolio companies that have been adversely affected by interest rate hikes.

In response to these challenges, many PE firms have shifted their focus to sectors and investment strategies that are less sensitive to interest rate fluctuations. Firms are also looking for opportunities in distressed assets, where they can capitalize on lower valuations and potential turnarounds. Despite the challenges, the current environment also presents new, promising opportunities. The increased financial stress for some companies, particularly those with high levels of debt, provide opportunities for those PE firms with expertise in restructurings and turnarounds to acquire these distressed assets at attractive valuations. As the economic environment continues to evolve, flexibility and strategic adaptation will be key for private equity firms to navigate these turbulent times successfully.