BOE interest rate hike to impact valuations

by Alice Murray 4 August 2022

The Bank of England has raised interest rates by 0.5% to 1.75%, marking the highest rate since the global financial crisis.

For private equity, the increase is expected to put pressure on valuations as well as IRR targets. Sam Webster, partner at Reed Smith, commented: “I think we can expect to see the interest rate hike exert some downwards pressure on valuations, though how much is difficult to forecast given the broader market conditions. What is clear is that there will be some new pressure on internal rate of return (IRR) targets for private equity houses, particularly those with assets coming up for refinancing. For new investments I suspect that valuations will fall before IRR targets do. All private equity houses will be presented with some new challenges, but these will of course vary by subsector.

“Today's hike could hand an advantage to strategic buyers who, to the extent they rely on leverage at all, tend to do so to a much lesser extent. At the low to mid-market range, where M&A exit opportunities can be more towards secondaries, that might prove less of an issue. The larger buyout houses could well find securing investment opportunities more challenging when competing against strategic bidders who have the advantage of reduced or no leverage, in addition to potential synergy realisation.”

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