The US Federal Reserve cut interest rates on Wednesday by 50 basis points, a highly-anticipated decision expected to energize exit markets for privately held companies.
The decision to lower rates by half a percentage point instead of a quarter-point cut indicates that the Federal Reserve is taking a relatively dramatic approach in its easing campaign. The first US interest rate cut in four years will lower businesses’ borrowing costs and should ramp up M&A dealmakers’ appetite.
More cuts are expected to follow over the coming months: Carlyle CEO Harvey Schwartz predicted that interest rates will be lowered three times before 2025 in a CNBC interview on Wednesday.
Even strategic buyers in M&A are sensitive to high interest rates, which increase the cost of capital. That has played out in the soft M&A dealmaking environment so far this year: The first half of 2024 saw an estimated $1.47 trillion in deal volume, 41% off the two-quarter peak of $2.47 trillion in Q4 2021 and Q1 2022, according to PitchBook’s Q2 2024 Global M&A Report.
The effects of easing monetary policy are already being felt in Europe: the European Central Bank, Swiss National Bank and Sweden’s Riksbank all cut interest rates in Q2, which helped to drive a 17% rise in M&A deal value over the previous quarter, according to PitchBook data.
The rate cuts may also encourage an IPO rebound, which would help GPs return locked-up capital to LPs.
The news will be welcome for GPs trying to raise new funds, both for the potential boost to exits and how it could shift LP allocations moving forward.
The opportunity cost for LPs investing in venture capital and private equity funds versus lower-risk investments like bonds has been especially high in recent years. That dynamic has played out in VC fundraising data: LPs committed $37.4 billion to 255 VC funds in the first six months of 2024, its slowest pace in four years.
But even as the Fed enters a new period of easing, it’s a far cry from the era of zero interest rates that supercharged the private markets and spurred a sustained bull run and a flurry of IPOs.
“My own sense is that we’re not going back to that,” Fed chairman Jerome Powell said in Wednesday’s news conference.
Featured image of Federal Reserve Chairman Jerome Powell by Andrew Harnik via Getty
