Deal market and private equity expectations for 2025

We anticipate a significant resurgence in the deal market in 2025, offering fresh opportunities for corporate and institutional deal making. This is despite the trends this year, with Q1-Q3 2024 showing subdued activity in the UK market, with Q3 2024 being the slowest quarter for transactions (across corporate, private equity and venture capital) since the end of 2020 when the country was still dealing with cycles of lockdowns. This sentiment is not surprising, given that confidence is still recovering from the highest levels of inflation since 1980, alongside interest rates close to the peak of this century.

However, there are reasons we are feeling optimistic. Capital Gains Tax (CGT) rose by 4 percentage points to 24%, rather than moving to income tax rates as feared, meaning private equity’s returns calculations are unlikely to be impeded to the point that investments are no longer viable. Regardless of differing opinions on the Budget, the new government and its Autumn Budget announcement brings much needed certainty to work within. Inflation is also back in the 2-3% range, giving the Bank of England (BoE) room to start reducing interest rates. This should help boost confidence, lower the cost of capital and expand the scope for leveraged buyouts. Notably, Q3 2024 marks the second consecutive quarter of growth in private equity (PE) buyouts, reinforcing expectations of an upward trajectory for private equity transactions in 2025. This should be considered in the context that, while the deal market has felt slower this year, 2024 private equity buyouts are still higher than those pre-pandemic.

We also expect a material uptick in the sale of portfolio companies by private equity over the next couple of years. The market factors noted above, coupled with pandemic-related performance issues and weak GDP growth, have forced investors to delay exits. As a result, there is a backlog of assets held beyond private equity’s typical holding period. Limited Partners (LPs), the investors funding these private equity funds have allowed time for value creation, but pressure is mounting by LPs to see distributions, especially when firms are entering their next fundraising period. 

Recent changes to employers National Insurance contributions (NICs) will squeeze margins, particularly in industries with a higher volume of lower-paid workforce. The economic impact of October’s Budget, uncertainty relating to the recent U.S. election, and the effects of ongoing global conflicts are yet to be seen. Despite the challenges and uncertainties that remain, the deal market continues to adapt and uncover opportunities. With a fair headwind, we expect the deal market to improve in 2025.

For more information, please contact Stuart Clowser.