Socorro Partners 2025 M&A outlook

We expect a moderate uptick in US and global deal volume and M&A activity in 2025. We expect this to be mainly driven by (1) improved investor sentiment (animal spirits); (2) tailwinds from a new political party and the expected easing of regulations under the new political regime in the US; and (3) an improvement in both the number and quality of assets for sale.  

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Investor sentiment  

We expect improving investor sentiment behind M&A in 2025, as the US economy continues to show strength. Specifically, based on recently released consumer spending data and consumer sentiment index, the US consumer continues to be resilient, albeit more discretionary, in their spending, which is a key driving force in keeping the US economy humming along the ‘soft landing’ trajectory. Based on our interpretation of Association of Corporate Growth’s (ACG) 2025 Middle-Market M&A Outlook survey, investor sentiment appears more optimistic across investor classes, as those which foresee ‘similar or lower’ deal volume was 23% in 2025 vs. 45% in 2024.

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Lower interest rates should also improve the appetite for M&A, as acquisition financing should become more attractive if the Federal Reserve continues to lower, or at least maintain, its current interest rate target and moderate longer-term rates, which should, in turn, lower the cost of capital to purchasers, especially PE-back sponsors. We would be remiss not to acknowledge potential headwinds against investor sentiment. A recession, as opposed to a soft landing, will certainly reduce investor confidence in deals. However, that may be the preferred outcome for the more savvy investors, as they stand to benefit from a ‘weeding out’ of the competition to pick through the rubble for long-term plays.  Other M&A sentiment headwinds such as continued global geopolitical conflicts in Europe and the Middle East, along with climate events (hurricanes and the Southern California fires) will likely continue to drive volatility in the underlying economic data. The ‘last mile’ in the Federal Reserve’s mandate against inflation could prove tricky and further add to the volatility.  

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Regime change in the US and the (presumed) easing of regulations

The removal of the election uncertainty in the US should also benefit the US M&A market in 2025, as there was deal slowdown in the buildup to Election Day in November 2024. While the overall level of M&A volume should improve, certain industries are better positioned to benefit from the administration change and expected easing of regulations, such as oil and gas. On the other hand, technology deals may still be under scrutiny. Other headwinds may include trade wars, tariffs, and the resultant sticky inflation; even the threat of them could damper investor confidence in certain sectors such as manufacturing, agriculture, and technology.  

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Sellers and the ‘supply’ of quality assets available for sale

An uptick is only possible if there is a sufficient number of businesses available for sale. We believe this will improve in 2025 as the ‘demographic wave’ of founder-owned private businesses continues to age out and look for an exit and/or succession plan. Further, private-equity backed businesses are increasingly likely to explore a sale of its portfolio companies. For one, to wind down older funds and return profits to investors. Further, any businesses which were acquired in the high volume late-2020 through first half 2022 are starting to reach the typical ‘holding period’ duration where an exit is contemplated. At minimum, businesses acquired with significant leverage may be reaching the end of debt maturity term where the interest rate environment is higher than when the deal was originally underwritten, thus implying an altogether investment exit or exploring a refinancing or recapitalization, which is also increasingly on the table. The above is in addition to the ‘natural’ shuffling of businesses as enterprises continue to rebalance portfolios, revisit optimal product lines and restructure their value chains to reflect new trade and geopolitical trends. We further expect ‘valuation gaps’ between buyers and sellers to continue to narrow which facilitates a more active deal market as sellers start moving off the sidelines.  

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Conclusion

While we expect an uptick in M&A activity in the US in 2025, we expect the year to ramp up slowly as the US emerges from the holiday season and a new political party takes office. As the year progresses and the policy landscape becomes clearer with regard to regulations, taxes, and tariffs, we expect M&A activity to gain steam and deal volume to exceed that of recent years. While the headwinds related to geopolitical, economic, and climate-related uncertainty still pose a risk, buyers continue to sit on significant dry powder to manage through what is shaping up to be a busy, and likely volatile, M&A cycle in 2025.