Where does the PE/M&A market go from here?
Based on the Mergermarket statistics for H1 2025, this year has been a mixed picture so far for European M&A, with deal volumes down, and deal values marginally up, as compared to the equivalent first two quarters of 2024.
That mixed picture reflects the sectors in which investors are looking to deploy capital in the current market, with tech, education, healthcare, services, transitional energy, infrastructure and defence being key sectors in which capital is currently being deployed; however, investment into industrials, manufacturing, retail and consumer businesses is currently much less fancied. This mixed picture results from the macro-economic backdrop that we currently operate in globally. The global business ecosystem has been pummeled as a result of the increased tariffs imposed by the US earlier this year, which in turn has triggered retaliatory tariffs elsewhere by other nations on the US, impacting import and export markets globally, particularly as regards the export of goods into the world’s biggest market, the US. Therefore, investment into manufacturing businesses that are driven by export markets is substantially down. Conversely, services businesses continue to thrive and continue to attract investment, even where the services are largely being provided cross-border. Products led and manufacturing businesses are out of fashion pending trade settling down and understanding the impact of increased tariffs on these businesses and their performance, and therefore deal pricing.
The other macro-economic factor at play globally has been the continuing conflicts in Ukraine and the Middle East, and perceived threats to the stability of Europe posed by Russia, coupled with the US rightfully insisting on European nations ramping up and spending sufficient monies on their own security, which has pushed up defence stocks and defence investment. Such defence investment (traditionally off limits to many private equity funds) is now potentially of interest to PE funds under the so-called ESSG tag, with the second “S” being “Security”. European governments are turning to the private sector to help support defence sector expansion, including new defence technologies, and this is consequently attracting some new PE investment. Germany alone for example has committed to spend 3.5% of GDP a year on defence and security, and has created a EUROS 500 billion infrastructure fund, so the contracts with the German state in this area could be very lucrative for investors who are prepared to invest in defence.
Technology investment generally roars on – no investor wants to miss out on the next big thing. The word “tech” used to attract a premium when an investor was looking to sell, and these days rebadging your business as “AI” is driving that increased price tag. Tech has been far and away the most active sector for deals this year, with around 25% of deals being tech-related.
Another noticeable feature of many deals in 2025 (with a growing number as compared to 2024) has been the continued use and rise of Continuation Funds to buy the relevant portfolio company from the original PE or Infrastructure Fund. Similarly, there has been an increase in the use of Fund-to-Fund Transfers of such portfolio companies, where both Funds are managed by the same manager/advisor, on the basis that (in each case) such a transfer amounts to an Exit and therefore a liquidity event. It’s the modern-day equivalent of “pass the parcel”, with a prize unwrapped (liquidity for those cashing out) as the music stops whenever a sale to a Continuation Fund or to another Fund managed by the same manager/advisor occurs. The music then starts again with the completed sale, and the portfolio company continues to get passed around to further Continuation Fund vehicles until the final recipient is able to achieve the ultimate prize of a final third-party exit. Having a significant third-party co-investor coming into the Continuation Fund/new Fund helps provide the comfort that a proper arm’s length price has been arrived at, although other investors remain sceptical on pricing if a third-party auction process for the portfolio company has not been run first.
Interest rates on debt largely continue to fall across the developed world (albeit very slowly), but it is having a favorable impact on deal pricing and there appears to be more debt liquidity in the debt market. This helps in terms of putting more leverage into deals, where leverage is available. Many businesses though continue to suffer from lots of overhanging debt, which is out of control, and which will need to be restructured to return to a viable business investment model for that business, and there is still a lot of “lending and pretending” by banks/credit funds that spells trouble down the road for such overindebted companies.
The fundraising environment continues to remain difficult, but has been softening. Investors with the right track record are finding that it is possible to raise funds in the current market, but are cautioned to be realistic in terms of the amount they can raise. Established larger funds continue to attract substantial inflows of capital unsurprisingly, and continue to hoover up market capacity.
All in all it is a mixed bag, but the current trend when talking to sponsors and investment banks is that M&A activity levels swung sharply upwards during August 2025, and most clients and advisors appear to have a full order book for the back end of the year, which shows that 2025 will result in a strong finish and perhaps make up the earlier lost ground. We will all raise a stein to that!
