Driving Efficiencies is Key to Private Equity Strategy
High interest rates can have a significant impact on private equity strategy, particularly when it comes to driving efficiency. Let’s explore why high interest rates matter to private equity firms and how they can use this environment to their advantage.
The impact of high interest rates on private equity firms
Interest rates are the cost of borrowing money, and they are set by central banks in response to economic conditions. When interest rates are high, borrowing money is more expensive, which can have a ripple effect throughout the economy.
For private equity firms, high interest rates can be both a challenge and an opportunity. Financing deals can be more expensive, which can make it harder to generate returns. On the plus side, it can create an environment where driving efficiency becomes more important than ever.
Reduce costs by focusing on operational improvements
One way private equity firms can use high interest rates to their advantage is by focusing on operational improvements. When financing is more expensive, it’s more important to increase the value portfolio assets. This means looking for ways to improve efficiency, reduce costs, and increase profitability.
For example, a private equity firm might invest in a company with a lot of waste in its production process. By identifying and eliminating waste, the company can become more efficient and profitable, which can help offset the higher cost of financing.
Consider companies less reliant on debt financing
Another way private equity firms can use high interest rates to their advantage is by focusing on companies less reliant on debt financing. When interest rates are high, companies with a lot of debt can be particularly vulnerable. By investing in companies with strong cash flows and low debt levels, private equity firms may reduce exposure to the risks associated with high interest rates.
Of course, there are also challenges associated with high interest rates. It can be harder to find attractive investment opportunities when financing is more expensive. Private equity firms may need to be more selective in their investments and focus on companies with strong growth potential and a clear path to profitability.
How we can help
High interest rates can be a key driver of private equity strategy, particularly when it comes to driving efficiency. At CLA, we have significant experience with the challenges associated with this environment. We can help identify investment opportunities for private equity firms for operational improvements, driving strong cash flows, and keeping low debt levels.
Craig Arends is a principal at CLA and is the managing principal of CLA's private equity practice. Craig brings a concentration of experience in providing accounting and transaction structuring advice for leveraged recapitalizations, purchase accounting and SEC reporting, assessing quality of earnings, and GAAP accounting. He has far-reaching experience with critiquing financial models and reviewing target companies' financial performance to identify cost reductions and/or operating efficiencies Craig has more than 30 years of experience in public accounting serving public companies, private equity groups, and companies, including a term as principal in charge of a Big Four Capital Markets Group in Moscow, Russia. He has led financial accounting due diligence projects for private equity investor groups and venture capital funds, primarily in the technology, communications, and manufacturing industries, as well as assisting with Foreign Corrupt Practice Act matters ranging from investigation of payments made, validation of compliance with corporate policies, and review of proposed transactions to ensure compliance. When not working, Craig enjoys watching any sports, but his most favorite are baseball, football and soccer.
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