There is an air of cautious optimism in the global M&A markets. Following a peak in transactions in 2021, the M&A market has had a turbulent time in the years since then. An environment of high inflation and interest rates heavily impacted economic growth, thereby stifling M&A activity. However, as we enter 2025, there is some certainty following the elections in major markets and the acceptance of adjusted economic reality, and this could lead to a more positive start to this year.
Borrowing rates have more than doubled from around 2% at the peak of the market in 2021 to between 5% and 8%, bearing a significant impact on the private equity market. Many private equity investors have preferred to move instead to a cautious strategy in which capital earns safe interest in the bank, fewer new investments are made, and existing businesses are pushed to mature for sale as an alternative route to returns. However, sellers are now adjusting to more realistic prices.
Interest rates drive economic growth, and the initial prognosis was that they would have fallen by now, but inflation remains persistently high. We are likely six months behind the point at which we had expected to be earlier in 2024. In certain markets, activity has already started to pick up. In the last week of November, four takeover deals worth £5.3bn were announced in the UK.[1] The full impact of the UK Budget and its effect on foreign direct investment remains to be seen, with the potential stimulus of further M&A activity as we head into the new year.
Following the election of Donald Trump, the US is being seen as the beacon of M&A activity in 2025. Due to Trump’s pro-business stance, there was a jump in stock prices for US investment banks. It is likely that the US will take the lead in the growth of the transactions market which should flow through to Europe and Asia within three to six months.
However, the mainland European market remains challenging due to political uncertainty, particularly in France and Germany. European transactions are very reliant on cross-border activity and any sense of turbulence will not provide investors with the confidence they require.
The impact of tariffs is expected to be more significant in Asia than in any other region. Meanwhile, they are adopting a wait-and-see approach.
As with any economic downturn, large deals were rarely witnessed last year, but the mid-market and lower mid-market continued to be active, and the number of deals is likely to grow this year. It is also anticipated that an uptick in activity in the US will lead to an increase in larger deals.
This is the first soft market for M&A insurance. Rates were fairly stable between 2010 and 2020 with the market taking off in 2021 as the M&A market peaked, however, rates have since fallen back. The W&I market has no experience of this rate of decline, but notifications remain at 2020 levels, just not quite at the dizzy heights experienced during the peak.
The W&I market in Europe and the US is sophisticated and saturated. However, there are significant opportunities for growth across Asia due to its potential size. India is currently being touted as the next hot market. However, as with any new insurance market, it remains untested. I remain cautiously optimistic that we will see growth for M&A insurance in 2025, after a few challenging years. However, I believe it will be patchy and geographically diverse. M&A insurers will need to choose their markets and their deals carefully to ensure solid returns and protect their claims ratios.
