The Benefits of Interest Rate Hikes on Deal Making

By Generational Group


Newton’s Third Law of Gravity states: For every action in nature there is an equal and opposite reaction.

This age old axiom holds true in the business world as well. 

A recent Pitchbook article pointed out the impact that interest rate hikes have been having on private equity business models:

The collapse of Silicon Valley Bank and Signature Bank, along with the rushed acquisition of Credit Suisse, has shaken industry faith in banks. As a result of the crisis and the Federal Reserve’s interest rate hikes that began last year, GPs (General Partners) that rely on banks’ lending arms are getting more creative in their capital deployment and moving to the lower end of the market for deals.

At the smaller end, lower-middle-market and middle-market deals will be easier to finance than deals at the top of the stack as they require fewer loans and fewer lenders. In fact, middle market add-ons as a percentage of PE deals closed were at an all-time high in 2022 according to PitchBook’s 2022 Annual US PE Middle Market report:

Add-On deals as a share of all PE middle-market deals

Add-ons tend to be lower middle market and middle market transactions given that they are smaller and are usually being “bolted on” to an existing portfolio company.

For these reasons, and based on what we are seeing as a firm so far in 2023, more and more PE firms are moving down stream into the middle market as interest rates continue to rise and anxiety in the banking sector continues. We have seen this before many times over the decades: When uncertainty reigns, private equity firms (as well as strategic buyers) move into safer havens, namely, middle market sized companies.

This is great news if you are the owner of a privately held company today. Odds are good that there are PE buyers active in your industry that you are not even aware of.

But we can help you find them, negotiate with them, and close a deal that benefits you and your financial legacy. 

How are we so effective in doing this for our clients?

Because we have extremely experienced deal teams AND over 35K registered buyers in our proprietary database DealForce, that have told us exactly what they are looking for in terms of industry, size, location and a myriad of other variables.  

So don’t let the current trends impacting private equity pass you by.  If you want to learn how we can help you take advantage of what is happening right now in the M&A market, contact us and we will be glad to help you out. 

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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