How the Fed’s Interest Rate Decrease Impacts Medtech, M&A, and Fundraising

In a somewhat unexpected move with positive implications for the medtech industry, the Federal Reserve (Fed) in September opted for a 0.5% interest rate cut. This major policy action was somewhat exciting because it was a more aggressive reduction than the anticipated standard 0.25% adjustment. In the short term, it had a positive impact on the stock market but other factors will determine the longer-term consequences.

Why Interest Rates Matter in Medtech 

Due to the capital-intensive nature of many business operations, interest rates can have a significant impact on medtech firms. Many companies in the sector depend heavily on debt to fund activities like research and development, clinical trials, navigating regulatory approval, and manufacturing scalability. Stating the obvious, the cost of borrowing can have a domino effect on the scope and pace of these types of strategic initiatives. Additionally, important inorganic activities (such as mergers and acquisitions) are dependent upon the availability of affordable credit. As a result, the interest rate cut (along with some additional anticipated future cuts) is expected to lead to positive shifts in several key financial areas, including M&A and fundraising. Of course, M&A cash availability is a prime concern, since it will help sellers continue to maximize their exit value in 2025. (As a side note, the industry experienced near-record valuations in 2024, which leaves advisory firms like ours highly enthusiastic about the future.)

We’re grateful (for obvious reasons) the Federal Reserve cut rates, because it shows the Fed is serious about maintaining an economic environment conducive to business expansion. While lower interest rates are generally favorable, the impact on medtech business activities is nuanced and worth examining across different industry sectors.

Impact on M&A Activity

As discussed in numerous MPO columns, M&A has historically been a cornerstone of medtech industry growth. Both large strategic players and private equity firms actively pursue acquisitions to strengthen their portfolios, expand into new markets, or acquire cutting-edge technologies. In recent years, however, supply chain disruptions and margin pressures have somewhat tempered M&A activity, complicating deal-making processes for companies with less than stellar performances. The good news for these companies and the medtech industry at large is that financially sound sellers have continued to excel in valuation optimization regardless of economic stability due to the sector’s dynamics. 

It’s no secret that large strategic companies and private equity firms often finance acquisitions through a combination of debt and equity. With a lower cost of borrowing, these firms can now take on more debt without significantly impacting their balance sheets. As borrowing costs decline, larger medtech companies will probably ramp up their M&A activities even more aggressively to focus on acquiring high-growth targets that offer complementary technologies or innovative solutions in areas like minimally invasive surgery, robotics, and digital health. These acquisitions will likely span all sizes and help companies gain competitive advantages as well as potentially offset some of the margin pressures many continue to face.

Another key impact of the rate cut is higher valuations will be supported by lower discount rates. The lower interest rate environment will directly influence how buyers evaluate potential acquisitions versus internal projects. This is particularly important in medtech, where acquisitions frequently command high multiples due to the industry’s strong growth prospects. For both strategic buyers and private equity firms, lower interest rates make it easier to justify paying higher multiples for acquisitions, especially in high-growth areas such as disposable surgical devices, robotic surgery, and AI-driven innovations. This trend will continue to support a high-valuation environment, which is advantageous for sellers that are considering an exit in both the near and intermediate terms.

Moreover, decreased borrowing costs may increase competitive pressure in the market. As the cost of debt decreases, more companies may feel emboldened to participate in bidding processes for attractive assets. While the industry already experiences competitive processes, it’s possible there may even be increased competition for high-quality medtech targets, potentially driving up deal values. For sellers, this represents a particularly opportune time to explore exit options, as multiple buyers will be vying for the same assets, thereby continuing to increase transaction prices.

The role of private equity (PE) in medtech M&A will also be affected. PE investors have been increasingly active in the medtech space, focusing on buy-and-build strategies to consolidate smaller, niche players into more comprehensive platforms. Lower interest rates allow PE firms to leverage acquisitions even more effectively, thus improving their return on equity. As a result, we are bullish regarding a potential uptick in platform deals and roll-ups, particularly in sub-sectors like contract manufacturing, specialty devices, and outsourced services, where fragmentation offers opportunities for consolidation.

Possible Implications for Fundraising and Debt 

Beyond M&A activity, the Fed’s latest rate cut will have significant implications for the ways in which medtech companies and startups approach fundraising and capital structure decisions. 

One anticipated major area of improvement will be in venture capital funding. Medtech investments often have longer timelines to achieving financial gains compared to other industries, such as life sciences. Therefore, increases in capital costs can hit entrepreneurs in this industry harder than others. The beginning of this rate-cutting cycle will hopefully signal a turning point for venture capital funding in the medtech space, which has faced turbulent conditions in recent years. Lower interest rates make traditional fixed-income investments less attractive, potentially pushing some institutional investors toward high-growth sectors like medical technology in search of higher returns. 

At press time, public market reactions to the rate cut were positive. For publicly traded medtech companies (like most of MPO’s Top 30), this could lead to stronger stock prices, making it easier to raise capital through secondary offerings or convertible debt. 

Following the Special Purpose Acquisition Companies debacles in the pandemic era, IPO activity in the industry has slowed dramatically in recent years, leading to a broader lag in funding activities. When early investors cannot receive and reinvest exit distributions, a bottleneck forms in the funding ecosystem. With the interest cut momentum, there is now optimism on Wall Street that 2025 will bring a resurgence in companies seeking IPOs, providing them with an attractive pathway to secure capital for growth while freeing up investor dollars for the next wave of entrepreneurial ventures.

We believe the Fed’s first step in a series of anticipated interest rate cuts over the next one to two years will create a favorable environment for the medtech industry. Cheaper borrowing costs are expected to fuel M&A activity and improve access to debt financing for companies across the growth spectrum. Venture capital and public markets are likely to see increased investment as investors seek higher returns in this lower-rate environment. Furthermore, the stabilization of the supply chain and continued margin pressures will push companies to pursue larger, transformative acquisitions to maintain competitiveness. Overall, we anticipate the industry is well-positioned to capitalize on this increasingly lower-interest-rate environment, accelerating growth and innovation in the process. Consequently, many current and future sellers in the medtech ecosystem can expect to reap the maximum benefits for all their stakeholders (patients, customers, suppliers, investors, and employees). Here’s to a brighter future.

Daniel Sheppard, CM&AA, has spent nearly two decades advising founder-owned medtech and finance companies in mergers and acquisitions, corporate finance, and strategic growth initiatives. He is currently a managing director at MedWorld Advisors and can be reached at
[email protected].