Private Equity Under Pressure: The Impact of Rising Inflation and Interest Rates on European Markets

Abstract

This thesis explores the impact of inflation and interest rate increases on the strategic decisions of private equity (PE) firms in the largest European markets. Through a combination of multinomial logistic regressions on PE deal data from 2017-2023, and seven interviews with industry professionals, the study reviews the influence of these variables on PE investments, exits, geographic allocation, industry preference, and deal sizes. The data indicates that rising interest rates lead PE firms to favor platform acquisitions, corporate splits, target asset-, and growth investments over traditional buyouts, which is supported by the conducted interviews. The geographic allocation of investments changes when interest rates rise, with data showing a preference for Australasia, and interviews suggesting the impact of other explanatory variables. In response to rising inflation, PE deals move towards sectors such as business- and financial services, with inherent pricing power and resilience. The findings show no statistical correlation between rising interest rates and different exit types, although qualitative findings show a preference for holding periods to await more prudent exit opportunities. Our regressions show an increase in deal sizes with rising interest rates, while our qualitative findings and external reports suggest that they have in fact decreased. From this, we conclude that an increased cost of capital affects financing structures in both directions