Investment Banking The factors driving M&A activity

On one end of the spectrum, Hubbard says, are deals driven out of necessity. These are often heavily influenced by the private equity (PE) market. PE firms are increasingly driven by creating returns for shareholders and funds, which means finding the right transactions that can increase in value within a shorter period, such as five years.

“In order to raise new funds, PE firms often have to put their capital to work and show success,” Hubbard says. Private equity accounted for about 34.6% of all M&A activity in terms of number of deals in 2024^{Disclosure 2} , but Hubbard says that percentage can be as high as 50% when conditions are right.

With PE activity having decreased during the volatile and challenging markets of 2022 and 2023 after historic activity in the 2021 post-COVID environment, Hubbard says we’re approaching a “perfect storm” scenario. If economic conditions stabilize, PE firms will need to make distributions to their limited partners, and activity could pick up noticeably. A report from PitchBook in December 2024 noted that PE firms held more than 29,000 portfolio companies around the world, with half of them having been owned for four years or more, which is about the length of time at which PE firms typically seek to exit investments.^{Disclosure 3}

On the other end of the spectrum are deals that are driven by individual companies. These transactions are the result of firms needing to fill gaps in their capabilities, extend into a new market, or even divest part of the business that may not fit with their long-term plans.

Macroeconomic factors—and specifically the availability of financing at competitive rates—can be important here as well, but this category of deals is often driven by industry cycles. The technology sector, for example, comprised a significant amount of the deal value in 2021 and 2022, Hubbard notes, as consolidation and innovation created unique opportunities for companies.

Other sectors, such as healthcare, are typically steadier in terms of activity because their level of demand is consistent. Hubbard says there’s been a resurgence in deals within the energy industry recently due to the interest in renewable energy and electric vehicles.

Opportunity can also present itself in down markets. Examples include companies that made acquisitions of firms that struggled to survive after the COVID shutdown, and more recently, financial companies that purchased assets of failed banks. Opportunistic transactions may also rise during times of slow organic growth as companies seek to find alternative ways to expand.

Looking forward, Hubbard says many industry observers expected M&A activity to pick up in 2025 after a slow 2024, but the ongoing uncertainty about the U.S. economy has kept deal activity a little slower. Still, it seems like only a matter of time until the timing factors align and activity picks up again.

“Because of the drought in M&A activity, you have some forces that are really driving sponsors to want to make transactions,” he says