Market Volatility and Its Impact on Mergers and Acquisitions

A drop in interest rates is likely to trigger an explosion of M&A activity among Private Equity firms in the current environment. This viewpoint is commonly shared by Consultants and Investors with whom I speak. However, is a prolonged period of lower rates actually likely in the foreseeable future? PE funds are desperate to transact, not only because they are sitting on record levels of undeployed capital from recent fundraises, but because many existing investments remain in underperforming portfolios longer than anticipated, awaiting favourable exit valuations. Bain & Company has warned of a "towering backlog" of companies that must be sold so that cash can be returned to investors such as pension funds, which have become overexposed to unlisted investments. This stagnation in capital recycling is critical, as it directly impacts PE firms' ability to generate operational fees. However, many overlook the fact that allowing interest rates to drop and thus enabling an explosion of Private Equity M&A is in itself highly inflationary. If the latent potential for deal activity within the market is fully realised, we will quickly face a scenario where interest rates need to be increased substantially. It seems we are heading towards a prolonged period of volatility, driven by gyrations in the interest rate environment. This volatility is unlikely to deter PE funds from transacting; however, the rules of the game will change. Margins will be squeezed to a far greater degree than before as competition for deals intensifies and the cost of transactions rises. More than ever, PE firms will need to focus on operational value creation within their portfolio companies to generate returns for investors. What's more, timing is going to be everything.

People don’t get how fast uncertainty shifts leverage. Our global aura of uncertainty is proving this in real time. Major geopolitical events seem to surface every day, and the stock market volatility is a symptom. But this extends into all aspects of life. If: • You’re building a home and can’t determine your construction material costs, that’s a problem. • You’re an importer and your cost of goods dramatically changes, it’s hard to make day-to-day decisions. • You don’t know if your business will survive, it’s hard to make a forecast budget or hiring plan. It’s especially true for M&A. Uncertainty is swallowing deals with tremendous potential everywhere. People point to tariffs, but there are other cascading effects. Whatever visibility a business thought they had just got worse. A seller thought they knew how their key customers behaved. But do they now? I met a seller who successfully diversified production in Vietnam and Thailand to offset the potential for tariffs on China. Now that plan isn’t as resilient as he thought. So as someone who buys businesses, I find myself assessing if these sellers: → Recognize and are reacting to the new reality. → Are living in the past. → Or in fantasy-land? (the worst) I see many sellers refusing to adapt as reality changes. This is all happening at the absolute worst time for them. They’ve worked for years to build the business, and the value of their exit is at risk just when they’re looking to sell it. As a buyer looking for businesses to acquire, 𝗷𝗼𝗯 #𝟭 is to spot risks. We have to identify “𝗱𝗲𝗮𝗹 𝗸𝗶𝗹𝗹𝗲𝗿𝘀” and develop a plan to minimize uncertainty post close. We model scenarios, pressure test assumptions, and perform diligence to validate the issues we identified and establish guardrails to mitigate risk. 𝗝𝗼𝗯 #𝟮 is communicating the implications of the uncertainty to all parties in the deal and adapt the deal accordingly. Our most important recipient of this communication is the seller. Often due diligence provides us with certain facts the seller doesn’t realize. Sometimes they have a blind spot. Other times, the they disagree because it costs them money. 𝗝𝗼𝗯 #𝟯 is pushing our team to operate in the face of uncertainty. It still amazes me when successful people claim “it’s impossible to know the outcome” They could at least suggest a range. This is a 𝘤𝘳𝘪𝘵𝘪𝘤𝘢𝘭 𝘴𝘬𝘪𝘭𝘭 for leaders (and applies to both sides). "I don't know" might be the truth, but I'd prefer to hear: “These 3 scenarios are most likely”. Or, “Here’s a range of outcomes”. I realize it’s impossible to know definitively, but think of the Dwight Eisenhower quote: ”𝘗𝘭𝘢𝘯𝘴 𝘢𝘳𝘦 𝘶𝘴𝘦𝘭𝘦𝘴𝘴, 𝘣𝘶𝘵 𝘱𝘭𝘢𝘯𝘯𝘪𝘯𝘨 𝘪𝘴 𝘪𝘯𝘥𝘪𝘴𝘱𝘦𝘯𝘴𝘢𝘣𝘭𝘦.” If you can’t plan around variables, you can’t price the risk. If you can't price the risk, you might lose an opportunity or money. As one of my mentors taught me: “Don’t let bad things happen to you.”

M&A in private equity isn’t paused, but volumes have pulled back. I've spoken with dozens of customers over the past few weeks, and one topic keeps surfacing: how recent tariff changes and public market volatility are shaping M&A activity in private equity. Here are a few recurring themes from those conversations: 1️⃣ Sector-Specific Impact: In sectors where input costs are uncertain, deal activity has stalled. Buyers can’t confidently underwrite when they can’t forecast a P&L. But dry powder still needs deploying, so insulated sectors (like software and consumer services) are attracting disproportionate attention. Some industries remain hot; others are on hold. 2️⃣ Deals Are Prepped and Waiting: Sellers are ready. Funds are under pressure to generate DPI. Bankers have CIMs and data rooms polished. The only missing piece is macro clarity. A few large trade deals could unlock a wave of transactions. 3️⃣ Bankers Still Pitching: Despite slower volume, PE firms are engaging bankers for mandates. Everyone is preparing. It's not a matter of "if" deals will return—just "when." 4️⃣ Strategics Re-entering the Market: After a quiet few years focused on efficiency, strategic buyers are showing up again. Many are generating cash, have delevered balance sheets, and are looking to M&A to help accelerate innovation and revenue growth. The prospect of deregulation and a more merger-friendly antitrust environment is also fueling renewed M&A enthusiasm. 5️⃣ Debt Capital Is Available: Despite the headlines, lenders remain active. The private credit markets are deeper than ever, and for high-quality assets, financing is readily accessible. Debt capital isn’t the bottleneck—it’s uncertainty. 6️⃣ Medium-Term Optimism: The sentiment across the board is that M&A will rebound. Even if 2025 is slower than hoped, the setup for 2026 and 2027 looks strong. There’s pent-up supply, LPs demanding distributions, and record dry powder waiting in the wings. The spring is coiled. It just needs a catalyst. Funds can tap GP-led secondaries and refinancings to create liquidity—but only for so long. At some point, real exits need to happen. Now is the time to streamline operations and modernize infrastructure—before the rebound hits. Is your team ready? What signals are you watching?