Private companies are stressed about raising capital

Private companies looking to fund growth in this high-interest rate environment are facing a tough time raising capital amidst falling valuations, according to a new Deloitte survey.

The problem is particularly acute for smaller companies. Many of the companies challenged by capital raising saw themselves putting out the “For sale” sign within the next six months, which could lead to an M&A boom later this year.

Deloitte’s Private company outlook: Raising capital, a survey of 100 private company C-suite executives, found that 88% of private businesses surveyed are having trouble accessing capital. Various factors have been squeezing private companies, Wolfe Tone, vice chair, and US and Global Deloitte Private leader, told CFO Brew.

“The number one largest factor that people saw as a challenge or a barrier was a decrease in valuations of their business,” Tone said. “Clearly, increasing interest rates and pricing was closely behind that. Liquidity challenges not far behind that.”

Private companies have been looking to raise capital to fund a range of growth initiatives; meeting talent needs and expanding tech capabilities are at the top of the list, Tone said. Not far behind was “increasing productivity and improving cost structures.”

“That’s almost one and the same, but overall it’s an aspiration to improve margins and productivity,” he said.

With interest rates growing, private companies are looking at a variety of ways to raise money. Among the survey respondents, 88% were turning to equity financing and 80% were tapping existing investors for capital, while only 48% were using debt financing and bank loans for funding.

That’s where Deloitte found smaller private companies, those with revenues less than $200 million, struggling. Smaller companies were twice as likely as their larger counterparts to say they were expecting “difficulty raising capital” through the rest of the year. Almost half (48%) of the companies surveyed said their valuations had decreased.

That decrease in value is making it harder for those companies to tap equity or investors for capital, and more likely that they’ll have to tap more expensive bank financing in the near future, according to Tone. Among companies that have seen their valuation fall, 91% admitted they were thinking about being acquired in the next six months, which may present significant opportunities for companies with strong balance sheets.