Private equity investment trends during high interest rates
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Curious to hear from this group on any anticipated behaviour or trends we might see from private equity firms relating to making investments in the current climate, especially given the high-levels of interest rates on borrowing in many economies around the world.
I think deals involving Private Equity firms have continued at it’s normal pace regardless of the interest rates, especially since the Feds have slowed down the pace of raising the interest rates. My company did a divestiture to a PE last year and the interest rates were climbing then, which had no impact. In addition, I think most of these PEs tend to turn around and sell the acquired companies for a quick profit anyway.
I believe we have already seen a decrease in M&A transactions in the PE space due to higher interest rates, which translates into higher cost of capital especially in leveraged transactions. We are also coming off a period where EV multiples were very high. So Sellers may still have high Enterprise Valuations expectations and those expectations may not match PE’s current price expectations. I imagine that Seller expectations will come in line with the current market pretty quickly and any PE dry powder will eventually motivate them to put that money in play. So I would expect PE transactions to pick up in the latter half of 2024, especially with continued speculation of an economic soft landing.
I feel that brakes put on by high interest rates are going to ease off. Dry powder is building up. Recently I read that it hits record $2.59 trillion at 2023 close. Most likely an equilibrium will reach somewhere 2024 where seller expectations lower and meet the increase pressure to invest from the buyers – leading to a better flow in deals.
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