How the Cost of Money Is Reshaping M&A, LBO Strategies, and Private Credit DynamicsA Market Redefined by the Cost of Capital

A Market Redefined by the Cost of Capital

Interest rates have fallen from their 2023 peaks but remain meaningfully above the era of ultracheap money. This shift is redefining how buyers underwrite risk, how M&A transactions are priced, and how capital stacks are engineered across both syndicated and private credit markets. The current environment rewards transactions that are strategically essential and cash-flow resilient.

Rate Environment and Its Impact on Deal Underwriting

In Europe, the ECB’s deposit facility stands at 2.00% (effective since 11 June 2025), while in the US the Federal Reserve’s target range is 3.75%–4.00% (as of November 2025). These levels have reopened financing windows but still impose a real cost on leverage. Buyers must now demonstrate credible deleveraging through operating cash generation rather than relying on multiple expansion or fast refinancing.

Global M&A Trends: Selectivity and Strategic Relevance

By Q3, global M&A reaccelerated, reaching roughly $1 trillion in quarterly activity—the strongest since late 2021. Year-to-date volumes are up ~24% versus 2024, tracking toward $3 trillion for the full year. The rebound is concentrated in larger, strategically essential transactions as boards prioritize scale, supply-chain control, and technology repositioning amid greater visibility on monetary policy.

Private Credit and Leveraged Finance: Activity and Pricing

Direct Lending and Leveraged Loans

Europe’s leveraged debt channels are active but increasingly selective. AFME estimates €147bn of Q3 2025 issuance across leveraged loans, direct lending, and high yield—up 61% year-on-year. Direct lending origination reached ~€28bn, reinforcing private credit’s central role when certainty of funds matters.

Pricing and Market Dynamics

Unitranche spreads in Europe have tightened over the last year. In core and upper-mid-market deals, margins have dipped below 600 bps over base, with high-quality credits printing in the 450–500 bps range. Pricing remains fluid as lenders navigate policy uncertainty and tariff-driven volatility. Sponsors continue to pay for speed, flexibility, and execution certainty—particularly where syndicated windows remain uneven.

How the Cost of Money Is Reshaping Dealmaking

Valuation Discipline Returns

With a higher risk-free anchor, equity hurdle rates have reset. Buyers prioritize targets with recurring revenues, pricing power, and low reinvestment needs.

Underwriting Becomes Rate-Aware

A 50–75 bps change in all-in debt cost can meaningfully affect equity IRR. Underwriting now stresstests multiple interest-rate paths and ties deleveraging to operational levers—gross-margin uplift, opex initiatives, and working-capital release—rather than refinancing assumptions.

More Creative and Alignment-Heavy Structures

Earnouts, vendor notes, minority stakes, and preferred equity have moved mainstream, especially in cross-border mid-market transactions. These structures reduce over-gearing and align incentives in volatile macro conditions.

Capital Stack Design Starts Earlier

In competitive processes, pre-arranged private credit or stapled financing solutions increasingly outweigh incremental pricing advantages. Certainty of closing has become a key differentiator.

Implications for LBOs and Private Credit Execution

Cash pays down debt; narratives do not. Sponsors lean harder on operational value creation as multiple arbitrage becomes less reliable. When syndicated markets open, borrowers diversify between term loans and selective high yield. When timing or ratings are tight, companies rely on unitranche or clubbed private credit structures with governance features that secure execution while preserving flexibility for bolt-ons and capex programs.

CGPH's Mandate in the New Cost-of-Capital Environment

At CGPH Banque d’Affaires, this environment plays to our strengths. Each mandate begins with strategic fit—why this asset, why this buyer, why now—followed by the design of an appropriate capital structure. Our work integrates lender dialogues that are datarich, early, and outcome-oriented to ensure financing visibility throughout the process. The cost of money is not a headwind to good deals; it is a filter that distinguishes strong transactions from weak ones.

FAQs

How do higher interest rates affect M&A valuations?

They raise discount rates and push buyers toward businesses with recurring revenues and proven cash-flow resilience.

Why is private credit so central in the current environment?

Because it provides certainty of funds, speed, and structuring flexibility when syndicated markets fluctuate.

How does the cost of leverage impact LBO returns?

Higher all-in yields reduce equity IRR unless compensated by strong operating performance or disciplined entry valuations.

What financing structures are becoming more common?

Earnouts, vendor financing, minority partnerships, and prepared private-credit solutions to bridge valuation gaps and de-risk execution.