The European Central Bank (ECB) has once again announced a rise in its interest rates, moving to 3.25% – a rise of 25 basis points -making borrowing more expensive. This follows the release of inflation figures from earlier this week, with the headline rate rising to 7%.
The decision – similar to that of the Bank of England’s most recent interest rate rise – has been made in an effort to help bring inflation levels down, which have soared as a result of various factors, including the Russia-Ukraine war and the difficulties with supply following the pandemic.
Claire Trachet, CEO and founder of business advisory, Trachet, highlights the implications of a further interest rate rise for this year’s investment outlook and how this will affect startups, the tech sector and investors alike:
“Today’s interest rate announcement, although expected and necessary, continues to bring uncertainty to the UK’s investment ecosystem – ultimately impacting recovery for the remainder of the year and impairing growth. The current banking crisis – including the collapse of Silicon Valley Bank and the Credit Suisse emergency takeover – means uncertainty and investment risk mitigation are likely to continue throughout the year.
“The current economic climate is presenting major challenges for companies with limited cash reserves. The European Central Bank’s decision coupled with the Bank of England’s most recent interest rate rise to 4.25%, as well as an inactive IPO market, means scaling businesses – predominantly in tech – are finding it increasingly difficult to secure funding. This is a significant concern for even healthy privately-owned companies, as declining shares of similar publicly traded firms can lead to a decrease in their value. We know companies will have to make difficult decisions and give up a larger portion of their equity in order to raise the same amount of cash and expect this to result in a growing number of down rounds in the coming year.
“The uniquely favourable conditions experienced in the past decade are unlikely to return soon, these conditions were defined by a prolonged span of exceptionally low global neutral interest rates, plentiful resources, and limited inflation. Over the last two years however, there has been a steady increase in inflation, requiring a prudent increase in nominal interest rates. Therefore, investors and businesses alike should adapt to the current market conditions by focusing on value creation and profitability over headcount growth and valuations.
“The UK faces significant structural challenges from a macroeconomic perspective. Despite deal volumes decreasing by approximately 30-40% compared to 2021’s record deals, the UK remains the most appealing investment option for European investment. While it may not be the hottest global market right now, the UK presents an opportunity to acquire exceptional businesses at discounted prices – mitigating the impact of interest rates on leveraged buyouts from private equity. Therefore, I believe that the UK’s current state offers a unique chance for strategic investment presenting a clear opportunity for the startup and scale-up community, particularly in tech.”
