A Recap: Expectations for 2025 Versus Reality to Date

2025 began with optimism that mergers and acquisitions (M&A) activity would continue to increase this year. In Australia and globally, 2024 saw the value of M&A activity increase on the prior year, with many surveys recording cautious optimism for increased deal flow in the year ahead across sectors and regions.

The key drivers of the expected upturn in M&A were the following:

• Record levels of dry powder in private capital and private equity (PE) hands.
• An expectation of further interest rate reductions.
• The benefits of reduced regulation—cutting red tape was a mainstay of the policy promises of many of the political parties elected in 2024’s election cycles around the globe.
• Greater political certainty following the unusually high number of elections globally in 2024.
• Hot sectors, including technology, especially digital transformation, and artificial intelligence starting to deliver (or not) on its transformative promise, energy transition and financial services.

However, Q1 did not deliver on these early promises in the manner expected. In the United States, the expectations of greater certainty that dealmakers looked forward to because of single-party control of the White House and both houses of Congress was tempered by a lack of clarity on implementation.

Whilst directionally it remained clear through Q1 that significantly higher tariffs will be imposed by the United States on imports from many countries in addition to China, the extent remained unpredictable and the real motivations for introducing them uncertain. Similarly, whilst the new administration’s efforts to remove red tape were eagerly anticipated by many, the pace and extent of executive orders has surprised and is leading to widespread challenge, again undermining certainty.

Citing productivity and wage growth concerns, the Reserve Bank of Australia indicated at the end of March that further target rate cuts were unlikely in the near term.

Then the US “Liberation Day” tariffs were announced on 2 April, and the hopes of a more stable economic and political environment for M&A in 2025 were confounded. The sharp declines in global market indices immediately following their announcement is testament to the significant underestimation of the scope and size of the tariffs initially announced. Pauses on implementation, retaliatory and further tariffs, as well as bi-lateral tariff reduction negotiations, are set to continue to bring surprises for some time. Market sentiment will continue to decline as recessionary fears abound.

Meanwhile, Australia is gearing up for its own federal elections in May 2025, and economists currently predict that interest rate cuts of around one percentage point (in aggregate) are likely over the next 12 months, with the first cut predicted in May.

So, what for M&A in the balance of 2025?

Predictions

Trade Instability

In terms of the political forces shaping Australian M&A, Australia’s federal elections have already been trumped by US tariff announcements.¹ We are at the start of the biggest reworking of international trade relations in over a century. With only 5% of our goods exports going to the United States, and (so far) the lowest levels of reciprocal US tariffs applied to Australia, the direct impacts to Australia’s economy are likely to be far outweighed by the indirect effects of the tariffs applied to China and other trading partners. Capital flows, including direct investment, must shift in anticipation of and in response to these changes, but forecasting the impacts on different sectors and businesses (and their effect on valuations) will remain complex for some time, weighing heavily on M&A activity until winners and losers start to emerge.

Foreign Investment

With a weak dollar and a stable political and regulatory environment, Australia will continue to be an attractive destination for inbound investment, not least in the energy transition, technology and resources sectors. Rising defence expenditure around the globe, and AUKUS, remain tailwinds for Australian defence sector investment. We expect further increases in Japanese inbound investment driven by their own domestic pressures. However, a report prepared by KPMG and the University of Sydney² pours cold water on a further strengthening of interest from Chinese investors, despite the 43% year-on-year increase in 2024, citing Foreign Investment Review Board (FIRB) restrictions on critical minerals and, more generally, a move toward greater investment in Southeast Asia and Belt and Road Initiative countries.

FIRB

Last year, FIRB made welcome headway in shortening its response times for straightforward decisions. The recent updates to FIRB’s tax guidance and the new submissions portal are likely to require front-loading of the provision of tax information by applicants, which should further support a shortening of average approval times. These changes are welcome, as is the introduction of a refund/credit scheme for filing fees in an unsuccessful competitive bid. Whilst these changes will not affect the volume of M&A, they may well facilitate an increase in the speed of execution of auction processes.

Regulatory Changes

Whilst we do not expect the outcome of federal elections to be a key driver of M&A activity in 2025 overall, the slowing of FIRB approvals during caretaker mode and the potential backlog post-election will lead some inbound deal timetables to lengthen in the short term, especially if there is a change in government. In Q2, we expect Australia’s move to a mandatory and suspensory merger clearance regime will have the opposite effect. Even as full details of the new merger regime continue to be revealed, we expect some activity will be brought forward to avoid falling under the new regime at the start of 2026.

Larger Deals

Although surveys report an increase in total transaction value in 2024, they also show there were fewer transactions overall. After the rush of transaction activity in 2021 and 2022, and the proximity to the end of post-pandemic stimulus, it is perhaps too easy to characterise the current environment as one of caution. However, market perception is still that deals are taking longer to execute, with early engagement turning frequently into protracted courtship and translating into longer and more thorough due diligence processes. This favours a concentration on deals with larger cheque sizes, a trend mirrored in Australian venture capital (VC) investing in 2024 and which we see set to continue in 2025.

PE

Globally, PE deal volumes surged in 2024, with Mergermarket reporting PE acquisitions and exits exceeding US$25.3 billion and US$18.9 billion, respectively. There remains an avalanche of committed capital to deploy and a maturity wall of capital tied up in older funds to return. It is these fundamentals that are expected to drive sponsor deal activity, in spite of the ongoing global sell-off in equities. PitchBook’s Q1 results for Oceania PE bear this out. Corporates looking to refocus away from noncore operations or requiring cashflow will continue to find healthy competition for carve outs among PE buyers, and an increase on the relatively low value of PE take-privates in Australia in 2024 is predicted. Family-owned companies with succession issues are also expected to provide opportunities for PE buyers. Nevertheless, we expect more secondary transactions, including continuation funds, will be required to grease the cogs in these circumstances.

VC Exits

The rising prevalence of partial exits via secondary sales is shown neatly in the State of Australian Startup Funding 2024 report.³ Whilst those surveyed still rate a trade sale as their most likely exit, secondaries were next and IPOs were considered the least likely. The report notes 59% of surveyed Series B or later founders said they had sold shares to secondary buyers, and 23% of investors said they sold secondaries in 2024. Following the success of secondaries like that of Canva and Employment Hero, secondaries will continue to provide much-needed liquidity to founders and fund investors alike. There is also a recognition of the value of such transactions in advance of an IPO, because they bring in new investors who may be expected to stay invested longer post-float. With valuations settling following their retreat from pandemic highs, PE acquisitions of Australian venture-backed companies rose in 2024 especially from overseas buyers. With the launch of more local growth funds targeting these assets, we expect that trend to increase.