New York, New York
February 10, 2015
Mergers and acquisitions (M&A) are set for another strong year in 2015, but there’s been some concern that deals could get disrupted when the Federal Reserve starts increasing rates, probably later this year. According to Paul Aversano, managing director for private equity services at the global professional services firm Alvarez & Marsal, a Fed rate hike just won’t make much of a difference when everything else points to a year with lots of M&A activity.
“Interest rates have been so low that even the initial couple of rate increases, they usually do it in quarter point increments, it’s not really going to move the needle, at least not for middle market deals,” says Aversano. “I don’t think it’s going to impact valuation multiples right away, and I don’t think it’s going to impact financing.”
Both buyers and sellers looking for deals
Aversano explains that private equity funds typically have a ten-year lifetime, so if they haven’t invested all of the money raised within that framework they have to send it back to their LPs. Even though M&A picked up last year, there are still a lot of PE funds halfway through their lifetimes or more, but only 25% invested, so there’s a lot of pressure to invest. There’s just as much pressure on the sell-side where holding periods, normally in the 3 – 5 year range, are averaging around 5.5 years right now, and PE funds would really like to realize their gains. Corporates, with plenty of cash on their balance sheets and slow organic growth, are also getting in on the action.
But there’s also growing concern that these perfect conditions won’t last. Deal-making is more difficult during an election year because so many people would rather wait for a result to clear up the political and regulatory risk, and by the time the presidential election is over there’s no telling where interest rates will be. That gives a companies and funds that might otherwise be willing to wait a strong incentive to start a deal this year.
Aversano expects large-cap deals won’t start to break up until after a couple of Fed rate hikes, somewhere around 1 percentage point above where we are now, and middle market deals will keep going strong for even longer, but because of the upcoming elections, he’s advising his clients to make deals sooner rather than later.
Energy M&A is slow, but could rebound when prices stabilize
Energy M&A, which was going strong when oil prices were still in triple digits, have slowed down significantly for obvious reasons, but Aversano doesn’t expect that to last. If oil prices stay low for the few years, then even some good companies will become distressed, creating a buyers’ market for energy companies (or PE funds) with cash to spare.