However, overall deal size does see a major impact from shifts in the Federal Funds Rate.

Interest rates are often cited as having a major impact on M&A activity, so it makes sense that private equity buyouts would be correlated with borrowing costs. However, statistical analysis of data from 2006 to 2024 shows that interest rates alone likely have little impact on private equity dealmaking (at least, in the US).

The Pearson correlation coefficient of buyout activity and the Fed Funds rate is approximately 0.20, suggesting a weak but positive correlation between the two. However, the correlation is not statistically significant – indicating that as interest rates decline, the impact to be had on overall buyout activity will be marginal. 

Meanwhile, the Pearson correlation between the size of buyout investments and the Fed Funds rate is approximately 0.40, indicating a moderately positive correlation. This suggests that as interest rates decline, the size of buyout investments also tends to decline. This relationship is statistically significant.

The findings are counterintuitive, as lower borrowing costs should increase both buyout activity and investment. However, the data suggests that factors other than interest rates – such as economic growth, valuations, and access to capital – have much greater influence over private equity buyouts. Indeed, private equity firms are currently sitting on an all-time high level of dry powder and the Philadelphia Fed is forecasting US GDP to grow 2% to 2.5% in 2024.

Lower interest rates may simply be a minor catalyst that enables these other tailwinds to accelerate buyout activity. Or, perhaps high valuations will continue to dampen buyout activity, despite the anticipation of lower interest rates. Financial markets are forecasting that the Federal Reserve will cut interest rates by 0.25 in September, but the S&P 500 is currently trading at a price-to-earnings ratio of 28.6, compared to a historical average of 16.1.