In February, McKinsey asked if the big wave of M&A deals expected last year would arrive in 2025. For the moment, the answer is: unlikely.
Although the S&P 500 and DJIA have rallied from near-correction territory, the uncertainty of the Trump administration’s tariff-on, tariff-off policy casts doubt on 2025 business and economic forecasts. That’s anathema to both buyers and sellers.
Roger Altman, founder of investment bank Evercore, told CNBC on Monday that the “gigantic uncertainty” arising from tariff flip-flops will cause business executives to hold back from “pulling the trigger” on deals.
“What does business do during uncertainty?” said Altman. “It says, ‘Let’s wait and see until the dust settles before we make a big decision.’”
Private equity funds will have a tougher time finding attractive deals that don’t require taking on outsized risk.
John Ahn, a vice president in the customer due diligence practice of Strategex, wrote last week that more than 80% of the PE firms the consultancy polled said tariff concerns have delayed transactions. More than 40% of those PE investors also expected lower deal flow in 2025.
Waiting Period
While some deals in negotiation could be pulled forward if equity markets continue to rally, “you would never buy a company not knowing what’s going to happen tomorrow, no less a week from now, a month from now or even a few months from now,” Ron Kahn, managing director and co-head of Lincoln International’s valuations & opinions group, told CFO Leadership on April 8.
Current conditions make it difficult for potential buyers to predict a target’s earnings or cash flows, which is critical in an LBO. No PE professional wants to do a deal “that goes sideways right out of the box,” says Kahn.
Neither do the firms that finance PE deals. “I think a lot of lenders today are saying, “I’m not going to lend into a company [when] I’m not exactly sure what the impact of all this will be,” says Kahn.
The decline in enterprise values of public companies “has to filter into the minds of a buyer or a seller of a private equity company,” Kahn says.
Sellers of PE-owned portfolio companies won’t push for transactions, either. “Sellers don’t want to lock in a realized loss,” Kahn says. “It creates a realized low IRR, which makes raising a subsequent fund difficult for a PE firm.”
Meanwhile, about 3,800 U.S. PE-backed companies are awaiting exit opportunities. But exits via an IPO are virtually on hold from the “tariff whiplash,” said Bill Smith, CEO of Renaissance Capital, in his Sunday email.
For now, private equity funds are “better off just holding on, collecting the management fee and praying that multiples come back up,” says Kahn.
The CBOE volatility index (VIX)—which hit 60 before settling to about 30 on Monday—would need to “stay below 25 for several consecutive weeks before we get a meaningful pickup in deals,” said Smith. Renaissance Capital’s U.S. IPO ETF was down nearly 17 percent year-to-date as of Monday’s close.
Cracks Emerging
Time may be the enemy of private companies that aren’t growing fast enough.
Lincoln International’s Private Market Index tracks the valuations of 6,000 PE portfolio companies every quarter. As of the end of 2024, earnings (EBITDA) growth for those companies in 2024 was 3%, down from 4% in 2023. The slow earnings growth and high interest expenses have increased the leverage of companies acquired in 2021 and 2022. That’s the exact opposite of what a financial sponsor wants: to generate at least incremental equity value in the years after a buyout closes.
Why is leverage building for those companies? The Lincoln Private Market Index companies could be paying higher interest rates on their loans, with nothing left after earnings to pay back principal, Kahn says. Pro forma adjustments to earnings numbers—90% of the private companies Lincoln tracks have such adjustments—may also affect the inability to pay down loans.
Says Kahn: “As I teach our analysts on the day they arrive, you cannot pay interest with pro forma earnings.”
