The Effects of the European Central Bank’s Interest Rate Hikes on Private Equity-Backed Companies in the Euro Area

Between July 2022 and September 2023 the European Central Bank raised its key interest rates by a cumulative 450 basis points. This thesis examines whether that tightening affected private equity-backed companies in the Euro Area more than comparable companies not backed by private equity. Companies acquired through a leveraged buyout carry more debt than other firms, which should make them more exposed to rising rates; during the 2008 financial crisis, however, they proved more resilient than their peers. The analysis compares the financial statements of 50 companies acquired through leveraged buyouts with those of similar companies that also received external investment, but without a buyout, across ten Euro Area countries over the period 2019-2024. Backed companies entered the tightening cycle far more indebted than the others. When compared with firms carrying a similar amount of debt, however, the rise in rates did not produce a clear difference in their cost of debt or overall performance, with only a weaker trend in operating margins. The results suggest that the vulnerability of private equity-backed companies lies in the amount of debt they carry when rates rise, rather than in the way they respond to the shock.