Seems like interest rates may stay higher for some time. Has this impacted deal flow, and how do you expect this to affect activity over the upcoming year or two? Assuming markets could generally be slower overall but anything else?
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Ah, the old interest rate conundrum! You're right, higher interest rates can indeed have an impact on deal flow. Here's how:
Higher Borrowing Costs: When interest rates go up, borrowing becomes more expensive. This can lead to a decrease in the number of deals, as companies might be less inclined to take on expensive debt to finance acquisitions or other business activities.
Impact on Valuations: Higher interest rates can also affect the valuation of companies. The cost of capital goes up, which can lower the present value of future cash flows, potentially making some deals less attractive.
Changes in Market Behavior: Higher interest rates can lead to changes in market behavior. For example, they can cause investors to shift from equities to bonds, which can affect the availability of capital for deals.
As for the outlook over the next year or two, it's a bit like trying to predict the weather. However, if interest rates do stay high, we could see a slowdown in deal activity. Companies might become more cautious and selective about the deals they pursue. But remember, every cloud has a silver lining. Slower markets can be a good time to start researching new markets or neighborhoods before activity drives up again.
And don't forget, in down markets, it's important to make yourself as essential as possible. Keep an eye out for any tasks you can take and move forward, especially those that no one wants to touch. These could include activities like cleaning up or re-sorting the folder tree, expanding the firm’s presence by updating their website or posting more of your deals.
So, while higher interest rates can pose challenges, they also present opportunities for those who are prepared and proactive. Keep your eyes peeled, and you might just find a golden opportunity in the most unexpected of places!
Sources: Learning curve in development, how do i "know the markets"?, 3rd Year HF Analyst Q&A, Interest rates...what now?
The general trend now is that a) rates up means valuations down, as you just can’t pay as much in an LBO and b) low performing to mediocre port cos are in a much tougher spot.
For A), this is hurting deal flow as a lot of current port cos will multiple contraction and there’s less selling because it’s harder to hit your mark. Even if a port co has performed well, losing 1-2 turns of exit multiple seriously hurts returns. So lots of busted processes and funds holding portcos for longer.
For B), lots of work on existing port cos due to cash coverage issues.
I largely agree with all the points made here but would add that while valuations are down across the board, top assets in attractive markets are still being bid up and fetching high multiples. A lot of dry powder sitting on the sidelines and even the best-performing funds are feeling the pressure to put money to work. Most firms have "fled to safety" and are willing to stretch for an A+ asset with high margins, recurring revenue / stable cash flows, large TAM, etc. Nobody wants to have LPs and co-investors hounding them in 6 months to a year about why you invested in a challenged operational story during a time of economic uncertainty that's now trending below cost.
Do you think the traditional "IBD - PE" route is still desirable in the situation of higher interest rate?
The route is desirable if you believe it to be the desirable path for “your” life. Asset classes swing in an out of favor due to many factors, a key one being interest rates.
Appreciate that! Actually I prefer interaction and communication with the people. Will you recommend some other career? Private credit seems good but it sounds like lending money to businesses which bank won’t lend. Thanks again for your help!
I highly recommend you take a step back and try to just gain a better understanding of different career paths and asset classes. You appear to have a loose grasp of private equity and credit to begin with and would greatly benefit from some light reading
Got it, I actually have read many articles from M&I. Could you plz recommend some books or materials? That would definitely help me a lot!
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