Since there’s no PE bowl and I know a lot of m&a consultants have PE clients, figure I’d ask this. How will current interest rate levels affect the deal structures of LBOs moving forward? Cont.

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There’s a lot to unpack here. First, with low interest rates (and the bull market run that we’ve been on), company valuations are super high. So the available targets are slim. Next, there is a ton of “dry powder” on the sidelines waiting for deals. Finally, a lot of this debt has shifted from traditional bonds to “bank debt” which is typically floating rate... so as interest rates increase, so will the required debt payments

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none of my clients are thinking heavily about rates when they look at a target.

most are dealing with the usual PE stuff:

they want to know if the investment makes sense given their thesis and strike zone.

a lot have a bunch of cash to put to work, many are trying to harvest so they can move on to raising the next fund and need a few solid exits

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Thanks for the response, I guess my train of thought was if the current/expected interest rate climate (for both sponsors and targets) would have any affect on the amount of debt undertaken for some of these buyouts/acquisitions

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I know debt is cheaper so easier for PE firms to load on more onto a company when they go in for a usual buyout (20/80 e to d so to speak) but don’t companies also have access to this cheap debt?

Maybe I’m over simplifying + also confusing myself, I know PE firms focus on HY debt, how do the late rates right now play into that activity?

Why’d the debt shift from bonds to bank debt? Wouldn’t it be more favorable to make them fixed vs floating since theres more expected rate cuts to occur and rates are pretty low as is?

A lot of it has to do with the companies that are being leveraged and the market for their debt as well as the structure/terms that the PE firm can get on bank loans vs. bonds. Check out this article which explains it pretty well: https://www.investmentnews.com/article/20171128/BLOG09/171129934/bank-loans-or-high-yield-bonds-maybe-both

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