The Old Playbook Is Losing Its Grip
For years, a private equity deal followed a familiar script. A sponsor found a good business, put in a healthy dose of leverage, and rode a growth story to an exit in five to seven years. That script still exists, but it does not close deals the way it used to.
Rates are higher than they were a few years back, and they are staying there. That changes the math on every deal. When debt is cheap, you can pay a full price and still hit your return targets because leverage does the heavy lifting. When debt costs more, leverage does less of the work, so the operating story has to carry more of it.
I sit across the table from private equity sponsors and standalone companies across industrials and services almost every week. I have watched this shift change how deals get structured, not just how they get priced.
What Used to Close a Deal Does Not Anymore
A few years ago, a strong management team and a decent growth rate were often enough to get a deal financed on favorable terms. Lenders were comfortable stretching on leverage multiples because the cost of capital made that stretch survivable.
That comfort is gone. Lenders now want to see real, provable cash generation, not a projection built on an optimistic hockey stick. They want to understand how a business performs if growth slows for a year or two, not just how it performs if everything goes right.
I tell people who are new to this business the same thing: a deal thesis that only works in the good case is not a thesis, it is a hope.
Where I Am Putting My Attention Now
Cash Flow, Not Just EBITDA
EBITDA has always mattered, but I am spending more time now on how much of it actually converts to cash. Working capital swings, capital expenditure needs, and customer concentration all eat into that conversion. A business with $50 million of EBITDA and poor conversion is a harder story to finance than a business with less EBITDA and strong conversion.
Structure Over Price
I am seeing more deals get done with structure doing work that price used to do. Earnouts, seller notes, and rollover equity let both sides bridge a gap on valuation without one side simply capitulating. A seller who believes in the growth story can take some of that belief in the form of future payments instead of demanding it all up front in cash.
Add-Ons Over Platforms
Building a platform from scratch and layering on debt to buy market share is a tougher sell right now. I am seeing more capital go toward add-ons for platforms that already exist, because the incremental leverage on a bolt-on is smaller and the synergy case is usually more concrete than a standalone growth story.
The Mistake I Keep Seeing
The mistake I watch people make is treating this as a temporary condition to wait out. I hear it constantly: “once rates come down, things go back to normal.” Maybe rates come down some. But the lending discipline that has come back into the market is not just a function of rates. It is a function of lenders and sponsors both remembering what happens when leverage assumptions do not hold.
Waiting for a return to the old environment is not a strategy. The sponsors doing well right now are the ones who adjusted their models to the current cost of capital and kept transacting, rather than sitting on capital waiting for a signal that may not come.
What I Tell Founders and Management Teams
If you are a founder or an operator thinking about a transaction, my advice is simple. Get your cash conversion story in order before you go to market. Know your customer concentration cold. Understand your capital expenditure needs for the next three years, not just the next one.
None of this is complicated. It is discipline, and discipline is not exciting to talk about. But the businesses that walk into a process with clean answers to these questions get better outcomes than the ones that show up with a growth deck and hope the market fills in the rest.
A Market That Rewards Preparation
I have spent twenty-five years watching capital markets move through cycles. Rates go up, rates go down, and sentiment swings with both. What does not change is that the businesses with real cash generation and clear-eyed management teams get financed in any environment. The businesses leaning entirely on a favorable rate environment to make their numbers work are the ones that struggle when conditions shift.
That is the environment I am operating in right now, and it is the one I am telling clients to prepare for, whether or not rates move much from here.