The impact of rising interest rates on acquisitions
Until a bit more than a year ago, money was so cheap that deals were more easily financed. Are rising interest rates impacting financing opportunities?
When a central bank raises interest rates, it almost always affects the interest rates demanded by the market, also for financing acquisitions. Rising interest rates make borrowing money to finance acquisitions more expensive, potentially making the feasibility of a potential deal less attractive.
This is a key reason why the market is still searching for a new balance in transaction prices. After all, buyers wish to pay less, while the selling party likes to stick to the valuation of a year ago.
Besides higher interest charges, banks may demand a higher own contribution than in recent years and require more collateral (e.g. pledging shares). The effect could be that companies will be more cautious about taking on debt and therefore postpone acquisitions, and banks will also be more cautious subscribing new loans to finance acquisitions.
For companies with low growth expectations, buyers will almost certainly come up with a lower valuation.
These trends suggest that private equity funds will be more inclined to make "add-on" acquisitions rather than "stand-alone" acquisitions in sectors in which they are not yet active. For smaller transactions, the general market expectation seems to be, that alternative lenders (e.g. family offices, business angels, ...) continue to gain ground over banks.
The greater caution shown by buyers is not necessarily negative. It can lead to more sustainable acquisitions and prevents unrealistic overvaluations and excessive financial risks.