Looking ahead to the fourth quarter, PJ Solomon CEO Marc Cooper sees the robust M&A environment rolling on. The greatest risk to transaction volume? Persistently high inflation. Pending federal legislation and an accommodative Federal Reserve potentially risks increasing borrowing costs. “$3.5 billion in stimulus? That’s concerning,” Cooper tells Mergers & Acquisitions. “One issue that would put a damper on the current environment is rising interest rates.”

It’s a view echoed by dealmakers from private equity to corporates: rate increases could force buyers to the sidelines as the cost of debt financing climbs.

“Do I think it’s going happen in the near term? We’re probably not going to see an issue for another year or so. There’s an accommodative Fed, money flowing into the economy, but at some point that has to reverse and it’s a question of how significant a reversal it is,” Cooper says. “Putting aside exogenous factors—cybersecurity, China, war—we’re going to see a very strong fourth quarter.”

Mild inflation actually creates an opportunity for companies to focus on operations—a test many companies have avoided during the persistently low inflationary environment of the past two decades. But passing through prices to end users creates its own risks.

“The question is how do consumers deal with it as prices are getting passed through,” Cooper says. “As this continues, it’s going to have a very negative effect. A lot of the concern I have is these are embedded taxes on a broad swath of the nation. Inflation is the worst thing for those in need because there’s nothing they can do about it; the wealthy can afford that.”

As the end of the year comes into focus, dealmakers are weighing a pending headwind to the current M&A tide.

Brandon Zero