Private Equity markets – changing the dynamics for 2023? A year that began with hope the private-equity party would rage on has seen the festivities fizzle out. Years of rock-bottom interest rates, coupled with abundant cash from institutional investors, powered a long boom in deal making by private-equity firms. As interest rates have leapt in the past six months, private-equity deals slowed to a trickle compared with the pace of recent years. The surge in interest rates this year has created an issue for the traditional playbook run by private equity, which has been bolstered for years by cheap debt that can be worked into a deal. Firms are struggling to find banks and other lenders willing to finance deals, particularly the multibillion-dollar transactions. The question now is how long the rate hikes will last, and whether they will dim the appeal of private equity to the university endowments, pension funds and other institutional investors that furnish the funds for deal making. The outsize investment returns that attracted investors to private equity depend heavily on plentiful cheap debt to finance buyouts. In a typical deal, the acquired company borrows at a substantial multiple of its annual cash flow to finance much of the purchase price. If all goes well over the next five years, that company will grow and sell out or go public at a higher price. In that scenario, returns on the slice of equity used to fund the original investment often far exceed typical stock market returns. But if all does not go well, private-equity successes can sour quickly. The current economic climate of slowing growth, rising interest rates and tight credit is turning buyout debt into an unsustainable burden for some private-equitybacked companies. Lenders are still willing to finance deals for midsize companies, which make up the lion’s share of private-equity activity. But terms have tightened, and a lender that would have advanced $100 million six months ago now will commit to half that. The drop-off in deal activity this year has been stark. Observers expect the biggest and most experienced buyout teams to navigate the new landscape without having to return cash to investors. Private-equity firms also need to worry about companies they already own.
Private Equity markets – changing the dynamics for 2023?
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