On Thursday, 21st September, the Bank of England (BOE) voted by a close majority of 5-4 to leave interest rates unchanged at 5.25%. The decision was influenced by a surprising drop in inflation, which fell from 6.8% to 6.7%. This welcome decision by theBOE represented a pause after 14 consecutive raises; raises felt by both individuals and businesses alike. Earlier this month, BOE governor Andrew Bailey - Speaking to the Commons Treasury Committee – held that interest rates “were much nearer now to the top of the cycle.”
In the week prior to the BOE’s announcement, the European Central Bank (ECB) expectedly hiked interest rates by 25 basis points from 3.75% to 4%. While the ECB has not ruled out additional hikes, Governor of the Bank of France, François Villeroy de Galhau, told reporters that “We are close, very close to the peak in our interest rates.”
During the same week as the BOE announcement, The Federal Reserve (Fed) mirrored the BOE with their decision to hold the benchmark rate at 5.5%. The decision to hold the benchmark rate came after a sustained period of rate raises that were deployed to combat the worst inflation since the early 1980’s.
While the aforementioned central banks are by no means racing to slash interest rates, there appears to be a common theme between them: interest rate hikes may be coming to an end.There is optimism of a potential end to rate hikes – in addition to soothing inflation – which may bring much needed economic stability. Such stability could see a re-ignition of large transactional activity in 2024 and beyond. How, then, could this re-ignition help commercial and corporate law firms?
For large, commercial and corporate law firms, Mergers & Acquisition (M&A) deals will typically account for a sizeable portion of their revenue. As a rule of thumb, M&A transactions will involve a combination of equity financing and debt financing. Equity financing can, amongst other things, involve raising capital through the sale of shares. In an effort to raise capital, businesses can effectively sell ownership in the company in order to part-finance M&A deals. Debt financing, on the other hand, generally takes the form of securing a loan from a lender. In turn, the borrower will pay interest on the loan. As interest rates fundamentally dictate the interest paid on loans, Central Bank policy has the potential to strongly influence deal flows throughout the calendar year.
In 2021, for example, interest rates in the UK and fed fund rates in the US were set to near zero. Consequently, transactional M&A activity skyrocketed. 2021 saw announced M&A deals exceed 62,000, with deal values reaching eye-watering highs of $5.1 trillion – smashing the previous record set in 2007 of $4.2 trillion. It should therefore come as no surprise that, during this period of booming activity, corporate and commercial law firms also experienced lofty average revenue. In the UK, the 50 largest law firms saw average revenue rise to heights not seen since before the financial crisis, prompting Eversheds Sutherland CEO Lee Ranson to class 2021 as “one of the more exceptional years”.
Fast forward to 2023 and M&A activity thus far has been sluggish in comparison. In the opening quarter of 2023, worldwide M&A activity shrank to its lowest level in more than 10 years, while deals involving UK companies fell to a seven year low in the first 6 months of the year. It is perhaps unsurprising that transactional activity has dipped while interest rates have conversely risen throughout the year.
Owing to the influence of rising interest rates on transactional activity, commercial and corporate law firms will be especially keen to hear of steadying central bank monetary policy. While there are numerous geopolitical factors to consider in 2024, including the US Presidential Election, a UK general election which must take place before January 2025 and the ongoing Russia/Ukraine conflict, the idea of plateauing interest rates may not only calm dealmakers fears, but may also stimulate their appetite for increased activity in 2024 and beyond.