M&A and Financing market review and outlook 2025 – opportunity knocks

As such, after a period of relative inactivity for corporates, as boards and shareholders waited on the sidelines, 2024 saw the tentative return of M&A, with bid/ask spreads beginning to realign and a renewed risk appetite amongst investors to pursue strategic growth.

As 2025 gets underway, many commentators are predicting economic growth will remain sluggish, but overall sentiment seems to be towards cautious optimism with more of a ‘back to business’ feel, and players being ready to take on calculated risk and deploy capital. We recently took the opportunity to catch up with our colleagues, Ian Tetsill, Head of Debt Finance Strategy and Chris Halliday, Global Corporate/M&A Partner to hear their reflections on how corporate finance markets have reacted and where they might be heading this year.

What type of financing activity did you see in 2024 Ian?

We definitely saw an increase in financing activity compared to the prior year. The stabilisation of inflation and interest rates and a more predictable macroeconomic environment encouraged companies to seek both debt and equity financing. There was a dramatic rise in refinancing activity as companies looked to optimise their capital structures and reduce their cost of capital where possible, with a surge in capital market issuances, as firms sought to take advantage of favourable market conditions. With all financing markets liquid and fully functioning, competition amongst lenders to deploy capital was strong.

In the corporate sector, bank liquidity remained positive and for strong borrowers with a good credit story, pricing and tenors remained relatively stable. More marginal credits, those operating in challenging sectors or unable to meet the relevant Bank’s return on capital hurdles, may have seen a reduction in lender appetite, including tenor compression, with shorter 3 and 4 year tenors (but with extension options) and some price hardening. 

In the private equity backed space, as well as refinancing, we started to see a return to funding for new platforms, as sponsors started to get their heads around the more stable, albeit higher, cost of capital. That said, with a continued supply/demand imbalance and hunt for assets amongst lenders, sponsors were able to benefit from some price compression and improved terms from lenders during the year. The resurgence of lower cost bank structures, as leveraged levels trended down, continued, but private credit still dominated in many situations given the flexibility and deep liquidity it offers. New symbiotic strategic alliances between banks and private credit funds also continued to develop.

Rigour from lenders was definitely a feature, with credit committees setting a high bar for new funding propositions, focusing heavily on due diligence findings and taking longer to provide approvals. We have noticed that lenders can be binary in their decision-making and are less likely to commit time and resource to credits which hold low appeal. There remains an attraction to defensive or high growth sectors and to companies who have market leading positions in their area, with the ability to pass on cost pressures. Proven sustainability of a business from an ESG perspective was also increasingly a gating item for most lenders. The key question lenders were often asking themselves was: does this business have a reason to exist in the future?

Chris, what was M&A activity like in 2024, and what types of deals did you see?

The market showed a definite improvement with deal volumes and values increasing and a degree of confidence returning. We saw a diverse range of transactions, including strategic acquisitions, mergers, and disposals. The numbers of carve-outs from large corporates as well as secondary private equity transactions both gathered momentum.

We noticed the technology and healthcare/pharmaceutical sectors were particularly active, driven by ongoing innovation and digital transformation needs. There was also significant activity in the energy sector, with companies pursuing acquisitions to enhance their operational capabilities.

Cross-border deals increasingly gained momentum as firms sought to expand their market reach, broaden their operations and take advantage of pricing arbitrage across geographies and markets. For example, we saw a trend of US buyers increasingly looking into what they saw as more attractive European markets, whether this was considering “public to private” transactions due to depressed share prices or private opportunities.

In the technology sector, companies were increasingly looking to acquire technology that could help them modernise their operations and stay competitive. This included acquisitions of software companies, cybersecurity firms, and companies specialising in artificial intelligence and machine learning. The healthcare sector also saw M&A activity, driven by the ongoing need for innovation and the integration of new technologies into healthcare delivery. The energy sector was another area of significant activity, with many companies are looking to acquire energy assets including wind farms, solar power installations, and other forms of clean energy.

Financial Sponsors continued to have capital to deploy but were selective and sometimes choose to write all-equity cheques with a view to refinancing in the medium term. Deal processes generally became elongated, with more preparatory work required to satisfy internal and external diligence requirements.

What are your expectations for 2025?

Ian: I expect the financing landscape to remain robust, with the flight to, and search for, quality remaining, without compromise. With the cost of capital starting to recede, we anticipate solid demand for debt financing. Necessity will continue to drive innovation in financing structures to give borrowers the flexibility they require and I expect more private capital hybrid solutions and the use of blended Asset Based/Cashflow lending structures will feature. We expect private equity firms to become increasingly active, as the valuation gap between buyers and sellers decreases and given the amount of capital continuing to seek out attractive investment opportunities.

Sentiment towards continental Europe may well remain positive compared to the UK, mainly due to the political changes and subsequent fiscal policy. Lenders across Europe are aggressively looking to build assets, and with Southern Europe predicting higher economic growth levels, this area will remain in focus. We also expect infrastructure related funding to remain a key focus for policymakers, driven by government spending plans.

A note of caution is that I do expect to see more defaults and distressed activity this year, as the consequence of high leverage on a lower EBITDA proves too much for some corporates, particularly where financial sponsors have not stepped up to support with additional capital and there are limited strategic options. Historically, when M&A picks up, restructuring activities would typically slow down, however, 2025 could be a year where both markets recover simultaneously.

Chris: I share a similar outlook – there feels to be a sense of cautious optimism. Notwithstanding the relative recovery in M&A activity last year, the outlook for M&A activity in 2025 still remains somewhat fragile. That said, I do believe dealmaking will continue to build as economic conditions improve. Companies are eager to invest for growth despite the broader backdrop and when market conditions are supportive, then corporates and sponsors will start recycling assets and that will kickstart a virtuous cycle of increased activity. Many corporates have adapted well to the challenging economic conditions of the past few years and have emerged stronger, making them either compelling strategic acquirors or attractive targets for acquisition. Private equity funds continue to find themselves holding investments for longer than they may have anticipated and this is likely to drive further activity, both by way of exits and secondary transactions.

There is also pent up demand in the public capital markets too with corporates sitting on cash and undrawn loan facilities that, correctly deployed for M&A, should be EPS accretive. 

I expect structuring techniques, such as vendor loans and earn outs, remaining important to broker deals and bridge misaligned valuation expectations. I also expect to see a continuing rise in corporate carve outs, with large corporates selling non-core assets in order to fund their own strategic growth. Public to private transactions are also likely to increase, particularly given the relative undervalue of the European public markets vs the US.

Regulatory scrutiny will continue to be a factor in 2025, leading to more hurdles and longer deal timelines. Governments and regulatory bodies globally are increasingly focused on ensuring that M&A activity does not harm competition or lead to negative outcomes for their nation. This means that companies will need to be prepared to navigate complex regulatory environments and address any concerns that regulators may have. However, firms that can successfully navigate these challenges will find ample opportunities for value creation.

As a global legal adviser operating right across the market, advising borrowers, lenders, buyers and sellers, we remain ideally placed to help our clients navigate through the opportunities and challenges that 2025 will bring.