Interest rates are a fundamental factor that influence investment decisions across all sectors, and private equity (PE) is no exception. In 2025, as the global economy continues to adapt to shifting market conditions, the cost of borrowing—dictated primarily by interest rates—will play a crucial role in shaping private equity deals.
In this blog, we’ll explore how interest rates affect private equity transactions, the challenges and opportunities they create, and how firms can navigate this environment to achieve favorable outcomes.
Interest rates are directly tied to the cost of debt, and because private equity transactions often involve leveraged buyouts (LBOs), the level of interest rates plays a crucial role in determining the structure of a deal. When interest rates rise, it becomes more expensive to borrow money, which can influence both the price of the acquisition and the amount of leverage used in the deal. Conversely, when interest rates are low, it’s easier to borrow at favorable terms, often leading to higher valuations and more aggressive deal structures.
At their core, interest rates impact private equity deals in the following ways:
As of 2025, many economies around the world are dealing with inflationary pressures and shifting monetary policies, which could lead to higher interest rates. Here’s how rising rates are likely to influence private equity activity:
The most immediate impact of rising interest rates is the increased cost of borrowing. In private equity, many deals are financed through debt, and with higher interest rates, firms will face greater debt servicing costs. This means that for a given amount of debt, the business must generate more revenue to cover interest payments, potentially squeezing margins.
How it affects deals:
Higher interest rates generally lead to lower valuations for businesses, especially for those where debt financing plays a significant role in the deal structure. Buyers are unlikely to pay a premium for a company if the costs of financing that purchase are higher, and this directly impacts the price a private equity firm is willing to offer.
How it affects deals:
Rising interest rates will likely cause private equity firms to adjust their investment strategies to align with the new environment. High leverage may become less appealing, especially if debt servicing costs are high, leading to a shift toward more conservative financing structures.
How it affects deals:
Higher interest rates can also affect the timing and structure of exits for private equity firms. When interest rates rise, the cost of debt financing for potential buyers increases, which can lower the demand for acquisitions or delay potential exits.
How it affects deals:
While rising interest rates bring challenges, they also present opportunities for private equity investors who are well-positioned:
As borrowing costs rise, many competitors—especially those heavily reliant on debt—may step back from deal-making. This could reduce the number of active buyers in the market, giving those who remain a better chance of negotiating favorable deals.
What to do:
Private equity firms that are well-capitalized and can handle higher interest rates will be in a better position to secure attractive deals at lower valuations, as fewer buyers are competing for the same targets.
In a higher-interest-rate environment, companies with significant debt loads might struggle, creating opportunities for private equity firms to acquire undervalued assets. Distressed assets or companies facing debt-related challenges could be bought at lower prices, and private equity investors can unlock value through operational improvements and strategic changes.
What to do:
Look for opportunities in industries or companies that have strong fundamentals but are facing short-term financial challenges due to rising interest rates. Buying these companies at discounted prices can provide significant upside if you can manage the operational and financial restructuring effectively.
Certain industries are less sensitive to interest rate changes, such as healthcare, technology, or consumer staples. These sectors often maintain steady growth and profitability even during periods of higher interest rates. Targeting these sectors can offer more stability in a volatile market.
What to do:
Consider focusing on industries that have historically been less impacted by interest rate changes. These sectors may provide more attractive investment opportunities with lower risk.
Rising interest rates in 2025 will undoubtedly have a profound impact on private equity deals, influencing everything from valuations and deal structures to exit strategies. However, by understanding the implications of these changes and adjusting investment strategies accordingly, private equity firms can continue to find opportunities for value creation.
The key to navigating a high-interest-rate environment is adaptability. By focusing on lower-leverage deals, prioritizing operational improvements, and identifying undervalued assets, private equity investors can not only survive but thrive in a volatile market. With the right approach, private equity firms can continue to generate strong returns even as borrowing costs rise.