From Leverage to Leadership: How PE Is Reshaping Buy-and-Build Strategies

Market Overview: How High Interest Rates Are Reshaping Private Equity Strategy

Central banks’ inflation-fighting rate hikes – notably those by the European Central Bank (ECB) and the Swiss National Bank (SNB) – have made deal financing significantly more expensive, with benchmark rates in the eurozone and Switzerland reaching multi-year highs. As a result, private equity deal activity across Europe has cooled. Deal counts dropped considerably in 2023–24 as sponsors adopted a more cautious stance amid economic uncertainty and tighter credit conditions. Still, the transactions that do proceed tend to be higher-value, high-conviction deals. Investors are focusing on resilient cash flows and strategic fits, knowing each acquisition must carry more weight in a thinned-out pipeline.

The impact is particularly acute in the large-cap segment, where highly leveraged buyouts have become harder to justify due to stricter lending terms and risk-averse capital providers. In contrast, the mid-market has remained more active, supported by higher equity contributions and add-on acquisitions. Sponsors are increasingly “equitizing” transactions, reducing reliance on debt while maintaining momentum through bolt-on growth. Meanwhile, despite financing headwinds, private equity dry powder remains abundant, with over a trillion dollars globally waiting to be deployed. The result is a deal landscape characterized by pent-up capital, disciplined underwriting, and heightened scrutiny on each move.

Key Challenges for Buy-and-Build in a High-Rate Environment

Elevated interest rates have raised the bar for performance across the board. With debt more expensive, the return profile of leveraged deals has shifted. To reach a 20% internal rate of return over a typical seven-year hold, a company must now deliver more than double the annual earnings growth compared to a low-rate environment. The pressure on earnings, synergy realization, and cash generation is intense. Every acquisition within a buy-and-build strategy must contribute meaningfully to value creation, or risk dragging down overall returns.

Financing constraints are also a critical issue. For example, a mid-market transaction in Germany involving a manufacturing platform recently stalled after banks withdrew term sheet commitments due to tighter credit risk models. This reflects a broader trend: lenders are pulling back and imposing more restrictive terms, including tighter covenants and higher interest spreads. This limits the ability of portfolio companies to pursue debt-financed acquisitions. Some firms are even facing refinancing challenges or covenant breaches, making aggressive roll-up strategies riskier than before. At the same time, seller valuation expectations have not always adjusted to the new normal, leading to difficult negotiations and wider bid-ask spreads.

Integration and execution risks have also increased. When financing costs are high, the cost of delay or underperformance in realizing synergies compounds quickly. Add-ons that once offered scale or geographic reach now require stronger strategic fit and faster integration to justify the investment. Compounding this, exit markets remain subdued. With fewer IPOs and fewer strategic buyers willing to pay peak multiples, many PE firms are holding assets longer, stretching the timeline and complexity of multi-year buy-and-build programs.

How PE Firms Are Adapting Their Buy-and-Build Approach

Faced with these challenges, PE sponsors are adopting a more deliberate, value-focused buy-and-build strategy. One key shift is the pace of acquisitions. Rather than rapidly adding scale, firms are focusing on fewer, higher-quality add-ons that strengthen the platform’s competitive position or unlock clear synergies. The goal is not just to grow revenue, but to grow margin and profitability in a way that offsets higher financing costs.

Capital structure is evolving as well. Sponsors are injecting more equity into deals and using less leverage. This reduces financial risk and interest burden but requires stronger operational execution to maintain returns. As a result, operational improvements have become the primary lever for value creation. Firms are investing heavily in margin enhancement, digital upgrades, commercial excellence, and leadership development to drive organic EBITDA growth within the platform.Deal structures are becoming more creative. To bridge valuation gaps and minimize upfront risk, many firms are turning to earn-outs, seller financing, and equity rollovers. These tools help align incentives and reduce reliance on debt, allowing deals to proceed even in tight financing conditions. At the same time, integration planning has become more front-loaded. Sponsors are embedding operating partners or functional specialists into portfolio companies to ensure execution stays on track and synergies materialize swiftly.

Finally, the investment horizon is lengthening. Portfolio company CEOs may need to rethink internal incentive structures, align teams with longer-term strategies, and prepare for an extended period of integration and performance tracking. With fewer attractive exit options in the near term, firms are taking a longer view, mapping out strategic acquisitions over multiple years. It’s a patient, disciplined approach that can yield strong returns for those who adapt effectively.

Outlook: The DACH Region and Mid-Market Private Equity in 2025

While the high-rate environment has added complexity, many market participants expect rates to stabilize – or even decline – over the next 12 to 18 months. The ECB has already signaled potential rate cuts if inflation continues to cool. This could gradually reopen financing channels and accelerate deal activity. In the meantime, well-capitalized funds with disciplined strategies are positioned to benefit, particularly from corporate divestitures, succession-driven sales, and competitive dislocation.

In Europe’s DACH region, a wave of SME owner retirements is creating a pipeline of attractive mid-sized businesses. These firms represent fertile ground for buy-and-build strategies, especially when supported by local integration expertise and long-term vision. As market conditions evolve, firms that have built resilient platforms and sharpened their operational playbooks will be in prime position to capitalize.

“Increasingly, portfolio company CEOs are turning to strategic advisors to help identify targets, evaluate synergies, and structure deals. M&A advisory firms that understand today’s pressures and offer hands-on execution support are becoming essential partners in navigating the current landscape.” – Frederik Beumer, Head of Benelux