03 Nov Bank of England holds interest rates at 5.25% – how will this affect M&A and investment activity?
The Bank of England (BOE) today announced that interest rates have been held at 5.25% -– a second hold in a row after fourteen consecutive hikes amidst the BOE’s bid to reduce widespread inflation. Claire Trachet, CEO and founder of business advisory, Trachet, highlights the implications of a second interest rate hold in a row for this year’s investment outlook and how this will affect startups, the tech sector and investors alike:
“Today’s interest rate announcement may bring a degree of calm to what has been a volatile economic period for the UK’s investment ecosystem. Although rates are still at a fifteen year high of 5.25%, consecutive holds point to the UK avoiding the predicted peak of over 6%, even if rates were to rise again at a later date.
“The current economic climate is presenting major challenges for companies with limited cash reserves. Despite The Bank of England announcing an interest rate hold, when you combine the current rates with an IPO market that shows no signs of revival, scaling businesses – predominantly in tech – are finding it increasingly difficult to secure funding. This is a significant concern for even healthy privately-owned companies, as declining shares of similar publicly traded firms can lead to a decrease in their value. We know companies will have to make difficult decisions and give up a larger portion of their equity in order to raise the same amount of cash and I expect this to result in a growing number of down rounds in the coming year.
“The uniquely favourable conditions experienced in the past decade are unlikely to return, these conditions were defined by a prolonged span of exceptionally low global neutral interest rates, plentiful resources, and limited inflation. Over the last two years however, there has been a steady increase in inflation, requiring a prudent increase in nominal interest rates. Therefore, investors and businesses alike should adapt to the current market conditions by focusing on value creation and profitability over headcount growth and valuations.
“However, despite the current environment and the fact that deal volumes decreased by 55% in the first half of 2023 compared to 2022, the UK still remains the most appealing investment destination for European investment. While it may not be the most vibrant global market right now, current conditions in the UK mean that overseas buyers in particular may seize the opportunity to acquire exceptional businesses at discounted prices, sparking a wave of M&A activity in early 2024.
