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By: Nathan Viehl, from U.S. law firm Thompson Coburn LLP.

In 2022 and 2023, rising interest rates caused a tremendous disruption to the private equity industry, which had become accustomed to a historically low interest rate environment in the previous decade. Higher interest rates have increased the cost of debt, which, in turn, affects the overall valuation of target companies. This has caused valuations to fall and forced a stalemate in some industries where sellers await a stabilization and return to previous valuations.

Notwithstanding these headwinds, the PE industry still has a historic amount of committed capital sitting on the sidelines (aka "dry powder"), which is pushing private equity firms to innovate and adapt their deal structures so they can still get deals done outside of the classic leveraged buyout model. These factors are impacting M&A activity across all industries and environments both within the private equity industry itself and the broader M&A market generally.

Existing Credit Agreements Have Compounded the Issue

As a first order of business, once interest rates began to rise, private equity executives turned much of their attention to its current portfolio. Buyouts executed in 2021 were completed at historically high multiples and with historically low interest rates. As a result, balance sheets have required maintenance and equity support to ensure compliance with these prior covenants in existing agreements and t......................

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