How high interest rates and private credit are reshaping M&A
- AU10
- Aug 14
- 3 min read
Written by Andre Ugalde Tchinov - Imperial College, BSc Economics, Finance and Data Science
In H1 2025, M&A deal volumes declined by 9%, yet total deal values rose by 15% year-on-year (PwC). What has shaped M&A activity and what factors will affect its future? This article will discuss two prominent factors: high interest rates and private credit.
Interest Rates:
The Bank of England has cut rates to 4.0% as of August 2025 making it the fifth cut of the past 12 months. However, interest rates remain relatively high in comparison to the near zero rates pre-2022. Rates had peaked at 5.25% in 2023 aiming to curb inflation, but high rates increased the cost of borrowing, decreasing appetite for M&A deals. M&A deals are often funded through debt because borrowing capital to finance a business acquisition is often a cheaper option in the long run than equity financing due to being tax deductable and the ability to maintain control of the company. High rates transmit to higher borrowing rates, decreasing the attractiveness of highly leveraged deals, causing a drop in M&A activity. With the UK's Monetary Policy Committee (MPC) split on whether they should keep rates higher for longer or pursue a gradual reduction, this uncertainty also decreases M&A activity as businesses are less confident that rates will be cut and borrowing costs will decrease.
Private Equity Deal activity slowed from the pandemic-era boom but remains historically strong, albeit with fewer large LBOs due to higher interest rates. The sectors hit hardest by high rates include the automotive and pharma industries, but defence and technology industries have been more resilient as they rely less on consumer credit and significant capital investment.
Private Credit:
Private credit, as opposed to bank lending, is when private institutions (i.e. pension funds and institutional investors) lend to privately owned businesses. Private credit has boomed recently, growing to $2.1tn AUM in 2024, expected to reach $3tn by 2028 (IMF). It has gained popularity as bank lending has attracted regulatory scrutiny following the 2008 Global Financial Crash. They also provide the recipients of the credit with more flexibility and less stringent conditions than bank lending. Private credit has plugged the hole of accessible financing in times of high regulation and interest rates: when syndicated loan and bond markets become less affordable, private credit can step in to provide debt packages for acquisitions. Its flexibility speeds up the deal making process, and keeps LBOs alive when banks have less appetite for lending.
While private credit has grown, it has presented many risks. Its lack of regulation make it more prone to default: many private credit loans have floating interest rates, making businesses vulnerable to default on interest payments if rates rise. Moreover, deals are privately negotiated, with limited disclosure compared to public debt markets. While once seen as a niche for smaller and riskier borrowers, private credit has scaled into larger, sponsor-backed deals, often multi-billion in size, reducing the perception it is concentrated only in risky SMEs
Conclusion:
If rates stay high, private credit will keep its foothold in mainstream financing. If rates fall, public markets such as bonds and leveraged loans may become more attractive. It is clear that as private credit grows, policymakers will push for greater transparency as it poses a regulatory risk. In terms of its implications for banking, investment banks are likely to generate lower lending revenues as they lose out to private credit, but could receive higher advisory demand. With private markets weathering macro headwinds pretty strongly, it looks like private credit is here to stay.
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