Adding its voice following some optimistic recent forecasts for the 2025 M&A market, McKinsey is taking a more balanced position, sketching out in a new report both a case for optimism and a number of formidable challenges.
Calling last year’s deal environment less than a “full throttle” comeback, McKinsey suggested it may be understandably difficult for some M&A professionals to be optimistic in the new year. Even the busier pace of 2024 limited global deal volume and value to roughly the averages of the past 20 years, the report noted.
At the same time, “many of the dynamics that stymied dealmaking for the past three years … are receding,” McKinsey observed. “A variety of compelling factors make it reasonable to construct an optimistic — perhaps even bullish — case for 2025.”
The report pointed out that economic conditions are more favorable than in recent years, and an oft-predicted global recession did not come about. The cost of capital has declined along with the easing of monetary policies, and valuations are normalizing, according to the report.
As noted previously, private equity investors are expected to be big players in this year’s M&A arena. Dry powder is estimated to total more than $2 trillion globally, which McKinsey called “extraordinary.”
Further, look for a possible surge in exits by companies that have remained “bottled up” in private equity longer than expected, McKinsey said. The report noted that average exit hold times reached an all-time high of 8.5 years in 2024.
On the other hand…
McKinsey warned that there could be significant challenges to the rosy picture painted above.
Some of the major restraints on the M&A market are more human-driven than macroeconomic in nature, the report opined, although “the length of the associated shadows is unknown.”
“Geopolitical instability and changes in trade policies, along with decisions of central bankers and regulators, are some of the most obvious currents that could influence economic growth and M&A activity in the year ahead,” McKinsey wrote.
In a McKinsey Global survey of nearly 1,000 executives representing 86 nations, 35% of respondents cited geopolitical instability as the greatest risk to domestic growth, with concerns about trade policies a close second.
In North America, though, the greatest concerns were ranked in a different order, with both “changes in trade policy or relationships” and “transitions of political leadership” rated higher than geopolitical instability.
Regulatory oversight is another potential drag on M&A this year, particularly in the United States, where new requirements aimed at antitrust enforcement will require more disclosure, providing greater transparency.
Of course, it’s difficult to predict what will happen in the United States on the regulatory front, given the change in political leadership. But, said McKinsey, “even if these new regulations were eventually relaxed, any change would likely be protracted — encumbered by the need to unwind a thicket of procedural rules.
