The Impact of Inflation and Debt on deals: A Trans-Atlantic Perspective

Management Insights


Fresh back from Orion’s international conference in New York, Richard Hall takes a quick look at the similarities and differences between the UK and its international competitors, with the benefit of some additional, on-the-ground input from Polestar’s associates.



Overall inflation is high, due to:

  • Lingering challenges in the supply chain, although the sharp increase in 2022 is now receding, with some rate normalisation
  • The conflict in Ukraine’s impact on global commodity prices for energy and agriculture
  • Energy costs, particularly in Europe, as a result of dependence on Russia and the impact of sanctions

To address this, central banks have raised interest rates aggressively (or at least aggressively for those of us that didn’t have mortgages back in the 90s!), but regional differences are evident.


The US

Inflation in the US, whilst at its highest since the 1980s, is heading south from its June 22 peak of 9.1% following 10 Fed rate rises from March 22 to May 23, including four consecutive 75bp rises. Short-term yields have exceeded long-term yields since July 22, implying a cautious view of long-term growth prospects, with the economic outlook impacted by:

  • Challenging growth and inflationary pressures
  • Robust labour market with unemployment rate below 3.7% since March 22, keeping wages in focus
  • Corporate valuations
    • Public market valuations of c.13.8x in Q1 2023, down from a 2021 peak of 18.1x and activity remains muted (see below graph)
    • Accompanying this, interest rate rises and risk appetite have reduced the level of debt available by 1-1.5 turns, creating a valuation gap between private company buyers and sellers
    • Notwithstanding this, there is still no shortage of funding and good assets continue to be in demand, especially with PE-backed trade buyers, which currently represent an increasing proportion of buyside activity
  • Concerns over China-Taiwan tensions
  • Domestic risks:
    • Regional bank failures
    • US debt ceiling uncertainty



Overall, the US economy remains strong and average multiples being paid by US buyers are still very competitive against those in the UK and Europe. Debt providers are showing an increased preference to support recession-resistant assets, with appetite in particular in:

  • Healthcare Services
  • Consumer staples
  • Industrials
  • Niche Manufacturing
  • Tech-enabled services

FX rates remain in the US buyers’ favour compared to the five-year average, albeit well off the peaks seen in October 2022.




Polestar sees international buyers, particularly from North America and both trade and financial investors, featuring strongly in processes and supporting valuations, even those in which they are not the ultimately successful bidder.

While market capacity is not under pressure, the higher returns currently achievable for debt may result in an asset reallocation by the sovereign wealth funds, with even a small % adjustment able to dwarf current availability.  Albeit, this would be largely focused at the very large end of the market, there may be some trickle through to medium and smaller businesses over time as debt funds seek to support ongoing lending levels.




UK inflation remains stubbornly high, still in double digits, albeit down a little from its original peak. Announced today, May 11 2023, UK interest rates will rise 0.25% to 4.5%. Despite this, some commentators still anticipate a further 0.25%-0.5% rise in the future.




Future expectations on the peak interest rate range from this being the peak to 5%, as inflation returns towards the 2% target, currently expected (guessed?!) to be hit at the end of 2024.

Against this, it would of course be easy to overshoot and apply unnecessary pressure on the economy, with a considerable time lag between rate rises and their effect. For small business growth and general M&A activity, clarity and confidence on the direction of travel for interest rates is important. Certainly, we are in a more stable environment than in H2 2022, when there was a noticeable dip in enquiries, delaying M&A and funding activity. Consequently, deal volumes in Q1 2023 were roughly 30% off from the previous two years, although we are seeing some recovery and expect some pickup over H2 as:

  • Those planning to retire still want to retire and tax rates remain favourable for exit
  • High levels of debt funding pre and during Covid come to the end of their tenor and need refinanced
  • Private equity portfolio platforms look opportunistically to identify bolt-ons to deploy capital and consolidate technology and customers

Debt leverage is being impacted by interest rates and concerns over future trajectory, of interest rates on the one hand and business performance on the other. Inflation and the cost-of-living rises are creating challenges in consumer-facing sectors  but, conversely, we are seeing strong interest from both debt providers and financial and trade buyers for:

  • Healthcare where large numbers of smaller businesses have gained some level of traction within the NHS during Covid and now need to grow or merge to ensure a wider roll-out and consolidate value
  • Cconsulting expertise, with a recognition of the value and need for targeted expertise and contacts, particularly in:
    • ESG as new regulations and public opinion put pressure on businesses to demonstrate that they are doing “the right thing”
    • Political risk management as the international outlook continues to be challenging
    • Process and efficiency improvement as increased labour costs focus management teams on offsetting labour driven cost increases.



Just as a brief note, European inflation too is falling, albeit still more elevated than the US, largely as a result of the heightened energy costs arising from its dependency on Russia for energy, but still substantially better than the UK. Logistics and Brexit may be a factor for the discrepancy with the UK as the it is still adjusting to the extra frictional costs of additional border controls and documentation requirements. Covid-reduced volumes prevented an immediate calamitous cross-border bottleneck, but as volumes recovered levels, systems and procedures struggled to cope, compounded by global logistics issues felt elsewhere.

Doubtless, over time this aspect of trade will settle down and signs are looking perhaps more hopeful with the less-confrontational stance being adopted towards Europe by Rishi Sunak compared to his predecessor.

In the meantime, indications are that the European Central Bank doesn’t want to be the lender of last resort for the eurozone and is aiming for longer term stability at a peak of 3.5-4.5% well into 2024.

For deals across the European market, there is a balance to be struck, with interest costs having increased, accompanied by a reduction in available leverage, deal volumes for secondary transactions between PE firms have halved year on year.


By Richard Hall on 11/05/2023