I am pleased to introduce the 2025 edition of our Private Equity Market Insights series. Each year, we analyse market data from our position as one of the longest standing dedicated private equity transactional teams in the City to identify current trends in deal terms, as well as providing insights on key issues impacting private equity M&A. Following two years of challenging market conditions, 2024 was a year in which green shoots finally began to emerge in the private equity M&A market.
2024 will likely be seen as a transitional year for the private capital industry. A significant reduction in inflation, and interest rates beginning to be cut across the UK, Europe and the US, resulted in increasing levels of confidence amongst private equity sponsors in the wider economic environment. However, whilst economic confidence grew, caution remained the order of the day as the outcomes of elections in the UK, US and France were awaited, as well as the most keenly anticipated UK budget in a generation. Whilst there has been significant sale preparation work undertaken in 2024 across a range of sectors, this has not yet fully translated into transaction volumes.
Deal terms have reflected the ongoing challenging market conditions, including the use of earn outs, deferred consideration and vendor roll to bridge valuation and funding gaps, and we anticipate that such structures will remain common while interest rates remain at their current levels. Whilst private credit continues to be the go-to solution in the market, 2024 saw an unexpected resurgence of syndicated debt, particularly for refinancing or repricing of existing facilities from 2022. The resurgence of the syndicated market, together with direct lenders still having plentiful supplies of dry powder to deploy, means there remains liquidity to support most transactions, although the overall cost of borrowing does remain high. Increased global regulatory intervention also remains a key theme as the number of regulatory regimes targeting M&A continues to increase globally and the focus of regulators becomes increasingly policy driven rather than just focusing on market share. Our Closer Look section this year covers the impact of these regulatory regimes on M&A and strategies for sponsors to manage them in an M&A process.
Although there has been caution in the private M&A market, sponsors willing to engage in more creative transaction structures have seen significant success. Increasing numbers of sponsors are considering and executing minority investments, and public to private activity remains high. Growth in above-the-line transactions has continued throughout 2024 as an alternative means of returning capital to LPs. The prevalence of continuation vehicles in particular is increasing, with many sponsors looking to establish such vehicles for the first time to allow for extended hold periods for well-performing assets, and to allow for further equity investment in such assets, particularly where a successful buy and build strategy has been demonstrated, but not fully realised.
As we move into 2025, whilst it had been expected there may be some more political and economic stability allowing the M&A market to flourish after a series of major elections, there does still remain significant uncertainty. The Trump administration has already shown its willingness to use wide-ranging tariffs (or the threat of them) for political purposes, notwithstanding their short to medium term potential impact on inflation and the economy. The true impact of the UK budget also remains to be seen and the uncertainty around this could be seen in the volatility in the UK bond market in early 2025. The upcoming federal election in Germany together with the continuing fragility of the French government and the threat of tariffs on the EU from the Trump administration could also lead to instability in Europe. However, whilst there is still political uncertainty, there is now a large backlog of private equity exits, together with very high levels of dry powder and this would indicate the long overdue uptick of transactional activity may now finally arrive in 2025.
We would like to thank our clients for their support throughout 2024 and look forward to continue to working with them into 2025 in what looks to be an exciting upcoming year.
