The mergers and acquisitions (M&A) market has lost momentum in early 2025, with global deal values down 17% year-over-year. Rising borrowing costs, inflationary pressures, and geopolitical uncertainty have made companies more hesitant to pursue large-scale transactions. Even as inflation shows signs of moderating, the Federal Reserve’s reluctance to cut interest rates, as seen in the most recent Fed update, has kept capital expensive, forcing dealmakers to rethink their strategies.
Many had expected that a cooling inflation environment would revitalize M&A activity. However, the central bank's decision to maintain elevated rates—and even adjust its 2025 inflation forecast upward—has reinforced market caution. For dealmakers reliant on leveraged financing, the math simply isn't attractive.
Adding to the uncertainty is geopolitical risk and shifting trade policies. The U.S. government’s decision to impose sweeping tariffs on Canadian and Mexican, and soon to be European, imports has injected volatility into cross-border dealmaking. Businesses that had planned expansion through acquisitions are reassessing potential risks, leading some to postpone transactions until there's more clarity.
Private Equity and the Search for Smarter Exits
One of the most noticeable slowdowns has been in private equity activity. Traditionally, PE firms thrive in an environment of low interest rates and accessible credit, but the current climate has made leveraged buyouts far more costly. This has prompted a shift in focus—from aggressive dealmaking to strategic opportunities that maximize value.
In a recent article, Ascension Advisory’s Chelsea Mandel suggests PE firms to rethink their exit strategies in uncertain times. Rather than waiting for the perfect macroeconomic conditions, firms should consider alternative liquidity options, such as sale leasebacks, which can free up capital to return to investors, without requiring a full exit.
Sale leasebacks are a tool for portfolio companies looking to strengthen balance sheets, particularly in industries where real estate is a significant asset. As Mandel points out, sale leasebacks allow businesses to monetize their owned properties while maintaining operational control, providing immediate liquidity that can be reinvested into growth initiatives or used to de-risk existing positions.
This strategy is particularly attractive in a high-interest-rate environment. Instead of seeking traditional debt financing, companies can unlock capital tied up in their real estate while continuing operations uninterrupted. For private equity firms struggling with extended hold periods due to weaker exit markets, sale leasebacks offer a way to drive investor returns without having to sell amidst a weaker market.
Sector-Specific Challenges and the Outlook for M&A
The slowdown in M&A is not uniform across all industries. Some sectors, such as technology and healthcare, have seen better resilience, while others—particularly those reliant on heavy capital expenditures—have faced greater challenges.
In technology, for example, while major deals like Google’s acquisition of cloud security startup Wiz have moved forward, overall deal volume has decreased. Many tech firms that once relied on aggressive M&A strategies to fuel growth are now prioritizing cost efficiencies and organic expansion. Even well-capitalized companies are becoming more selective about acquisitions, focusing on strategic fit rather than just rapid scaling.
As discussed, private equity-backed transactions have also taken a hit. Buyout firms, which historically accounted for a significant share of M&A activity, are experiencing a slowdown in dealmaking due to the higher cost of leverage and general market uncertainty. Private equity firms have a record amount of dry powder—unspent capital earmarked for deals—but are hesitant to deploy it under current conditions. The uncertainty around interest rates, inflation, and geopolitical risks, combined with the risk of overpaying in a volatile market, has made firms more cautious.
Despite these headwinds, certain subsectors present opportunities. Industrial and infrastructure assets, for instance, continue to attract interest due to their stable cash flows and long-term investment potential. Logistics and supply chain-related businesses, bolstered by the sudden need to nearshore, are also seeing renewed demand. However, deals in these spaces are taking longer to materialize as buyers and sellers navigate valuation gaps and financing constraints.
What Comes Next for M&A?
While M&A activity remains sluggish, a rebound later in 2025 is expected. If interest rates stabilize and economic conditions improve, deal volume could regain momentum. Additionally, private equity firms continue to sit on record levels of dry powder, meaning that when the environment becomes more favorable, capital deployment could accelerate rapidly.
Another factor that could revive deal activity is the growing pressure on corporate balance sheets. Many companies that held off on restructuring during the past few years may now need to take action, leading to a wave of divestitures and spin-offs. For PE firms and strategic buyers with cash on hand, this could create an opportunity to acquire high-quality assets at more reasonable valuations.
There is also the potential for an uptick in distressed M&A. If economic conditions remain uncertain, highly leveraged businesses may struggle to refinance debt, creating opportunities for well-capitalized buyers to acquire assets at a discount. While the current environment is challenging, firms that can adapt their strategies—whether through alternative exit options like sale leasebacks or creative financing structures—will be best positioned to capitalize on the next wave of M&A opportunities.
For now, dealmakers remain in a holding pattern, but history has shown that M&A markets are cyclical. When conditions shift, those who have positioned themselves strategically will be able to act decisively and secure the best opportunities in the next phase of market activity.
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