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GF Data Report: The Cost of Capital Hits Hard in Q1

Bob Dunn of GF Data discusses how the high cost of debt impacted dealmaking in the first quarter of 2023

In a complicated economic environment, data can help us decode the moment for M&A as well as what’s ahead. Bob Dunn, managing director of GF Data, an ACG company, sat down with the Middle Market Growth Conversations podcast to share what the numbers had to say about middle-market M&A in the first quarter of 2023 and what’s next for private equity-backed companies.

To discover more of Bob Dunn’s Q1 analysis, listen to the full episode of the Middle Market Growth Conversations podcast above or subscribe in Apple Podcasts or Spotify.

When Dunn analyzed the Q1 data, he says one thing stood out: how the high cost of capital was affecting middle-market, private equity-backed transactions. GF Data analyzed 70 transactions that took place in the first quarter and noted the skyrocketing price of debt—and how dealmakers are responding.

“We saw significant increases after the Fed interest rates were raised last year and the beginning of this year, bringing average [pricing on] senior debt up to 8.1%. That’s the highest we’ve tracked since the beginning of 2007,” says Dunn. That number is also a major leap from the 6.7% average in the fourth quarter of 2022.

Watch: Bob Dunn Discusses the High Cost of Capital

Subordinated debt similarly saw a two-percentage-point pricing increase—a jump that Dunn says he hasn’t seen the likes of in several years. “It’s more expensive to borrow and not as many deals are getting done because of it,” he concludes.

While the M&A market overall was certainly quiet in Q1, companies that are still doing deals responded by increasing the amount of equity in their transactions. GF Data recorded average equity contributions of 59% across all the middle-market, private equity-backed deals they tracked in the first quarter. That’s a significant bump up from the average of 54.3% in 2022.

“The question is: Can that [percentage] continue to go up and can private equity firms still make their return targets if they’re putting that much equity into the transaction?” Dunn says. “I do think there’s a mentality now of ‘get the deal done.’” Because of that, he thinks firms are choosing to minimize their high-cost debt in the moment and wait for rates to fall.

But those better times of cheaper capital may not come anytime soon. After more than a year of aggressive rate hikes in a bid to tame inflation, the Federal Reserve has sent some signals that they’re not done tightening. In a June 29 address in Spain, Fed Chair Jerome Powell noted that two or more rate raises before the end of the year were a strong possibility, pointing to continuing inflation and a robust labor market.

“I think there’s a belief that interest rates aren’t going anywhere for a while and that if you’re going to get a transaction done, it’s kind of do it now or you’re out of luck,” Dunn says. “We expect that to continue.”


Words by Hilary Collins, ACG’s Associate Editor.


GF Data releases analysis of middle-market M&A transactions on a quarterly basis. Stay tuned for our coverage of GF Data’s Q2 2023 report.


GrowthTV and the Middle Market Growth Conversations podcast is produced by the Association for Corporate Growth. To hear more interviews with middle-market influencers, subscribe to the Middle Market Growth Conversations podcast on Apple PodcastsSpotify and Soundcloud.