Show me the money!

As companies continue to falter, private equity-backed businesses look to their sponsors to prop up their balance sheets through equity capital infusions.  When firms acquire these businesses initially, they are unable to incur the levels of debt they have in the past, reducing the previously received outsized returns. 

With reduced returns comes reduced risk, though, massively disrupting the private capital and debt markets. Lower equity profits also narrow the margin between equity and debt returns.  With lower asset values, fewer private equity firms are selling their portfolio companies, leading to reduced deal flow. Reduced deal flow means other private equity firms need to be more selective in choosing which deals to bid on in any competitive process, which can lead to fewer and thus lower bids for any specific company.  Thus, these higher rates can have broad impact on the deal economy.