Top of the Morning: CEO Macro Briefing Book - Insights for Dealmakers
The desk believes that 2025 may herald significant opportunities in the M&A landscape, driven by stabilizing valuations and a supportive regulatory environment. Per the full note from UBS's Chief Investment Office, past hindrances in deal activity, primarily due to valuation discrepancies, are beginning to ease. The implication is that higher levels of deal-making could bolster investor sentiment and align with a more stable inflation backdrop. Current market conditions and growth prospects are aiding this sentiment shift, particularly as M&A activity saw a modest increase previously, suggesting a solid foundation for further growth.
What the desk is arguing
The desk argues that signs of stability in valuations and a supportive regulatory climate could prime the M&A market for significant activity in 2025. Per the full note, UBS's commentary highlights that M&A has already seen a modest bump and could return to pre-pandemic levels as buyer-seller disparities lessen.
Furthermore, UBS noted that inflation pressures appear to be stabilizing, which typically enhances risk appetite among investors. Current corporate valuations have shown stabilization, marking a critical shift that is likely to facilitate more transactions in the venture capital and private equity spaces.
Where it sits in our coverage
Our current consensus target for the M&A activity-driven currency pair is 1.075, with estimates varying from 1.04 to 1.12. The following firms are key players in our analysis: - jpmorgan - 1.10 (Mar26) - bofa - 1.04 (Mar26)
This view aligns closely with jpmorgan, which expects strengthening M&A dynamics, while bofa appears more cautious, sitting at the lower bound of our predicted range.
How other firms see it
Aligned firms like jpmorgan and citi share a bullish outlook on M&A activity, anticipating an increase in transaction volumes. In contrast, bofa adopts a skeptical perspective, emphasizing caution due to persistent economic uncertainties.
Market interplay seen in the EUR/USD and insights from upcoming macroeconomic indicators may provide additional context to this evolving M&A landscape and its potential currency impacts in the coming months.
01M&A activity expected to rise significantly in 2025 due to stabilizing valuations.
02Inflation is stabilizing and growth remains supportive, creating an encouraging backdrop for deal-making.
03Regulatory climate perceived as supportive for mega-deals, potentially lifting large corporate transactions.
04The sentiment shift may influence FX movements tied to M&A spikes, specifically concerning USD volatility.
Market implications
Traders should monitor the 1.075 level as a potential pivot point, which could indicate bullish momentum in M&A-related currency movements. Additionally, any substantial news from the deal-making horizon leading up to 2025 could act as a catalyst for volatility in the relevant forex pairs.
Risks to this view
Should economic growth falter or inflation unexpectedly spike again, these factors may create renewed caution among investors and negatively impact M&A activity. This may lead to broader market volatility and reversals in the bullish sentiment currently shaping expectations for 2025.
ubs
Hi everyone, Dan Cassidy here, welcome back to Top of the Morning on the UBS Market Moves podcast channel. For today, we will continue our series of conversations around the CIO's CEO Macro Briefing Book Series, today focusing on insights for dealmakers. The latest edition of the series answers the most commonly asked questions our business owner clients have about M&A, private equity, venture capital, and the IPO space.
So with that, today we are joined here in studio by Paul Hsiao, Asset Allocation Strategist for the Americas with the UBS Chief Investment Officer. Paul, great to be with you here in person. Thank you for dropping by.
My pleasure. Thanks for having me. Absolutely.
Before we get into it, I am curious here at the start with M&A, what's behind some of the great expectations some investors and funds have for 2025? I think when it comes to the dealmaking space, M&A is one of the relative bright spots. M&A did increase modestly last year from 2023, and there are signs that it's set to increase once again, activity is set to increase once again in 2025. conditions continue to be supportive with inflation relatively stable.
I know the last couple of prints have been a little hotter than expected, but growth has been quite supportive recently. Valuations have stabilized for a lot of companies, which has been a hindrance towards more dealmaking activity in the past. According to a survey done by Bain & Company, buyer-seller valuations have been the primary drag on dealmaking over the last couple of years.
With some stability in the valuations in both the private and public equity space, it looks like that could be a market-clearing activity for dealmaking. Thirdly, the regulatory environment seen by a lot of firms now has been seen for a lot of supportive. A lot of M&A deals have been mega deals that have been driving the markets, which can be complex and be prone to scrutiny by regulators.
A lot of businesses now see, with the new administration on board and the change of who's the head of SEC, it seems like a more pro-business environment that is encouraging animal spirits to rise once again, as we're seeing from some business surveys. Finally, there has been a pressure for liquidity just in the dealmaking space as financial sponsors continue to be pressured to return money to investors, and as some of these portfolio companies become more historically mature. Well, now that we have the context behind the great expectations, and thank you for defining that a bit for us, Paul, another hot topic for investors, of course, has been artificial intelligence, AI, which I know the chief investment office here at UBS has been speaking a lot about in recent years.
How is that impacting the dealmaking space? You know, AI has been a really hot topic for investors, whether you're both in the public market space or the private market space. I think over the last couple of years, there has been more awareness, especially in the C-suite, about how AI has the potential benefits of AI applications.
That has been driving a lot of CapEx. Large tech firms, the mega-caps, are forecasted to increase their AI-related CapEx by 30 percent according to various new sources, and we're quite optimistic on AI in the CIO space. With that, I know that AI-related VC has surged really last year to 44 percent of all deals in 2024.
That's up from 15 percent of deals in 2020, at least helped by nominal support by the administration with things like the $500 billion partnership announced earlier in February. I know that AI-related M&A is also set to increase as really strategic demand solutions like data analysis, automation, language processing, generative AI are really seen as the key drivers of value creation in the M&A and VC space going forward. So AI is still a very hot topic.
It is encouraging for investment and is really driving investment in the M&A and VC space. Okay, so AI seemingly having a notable impact. What about take-private deals?
What's behind the rise of those, Paul? I think in this cycle in deal-making, the rise of take-privates has been quite interesting and a new facet of this environment. Take-private activity remained quite robust in 2024, helped by the rise in public equities.
Deals were valued around $140 billion in 2024, roughly 40 percent higher than 2019's levels. So this is really a change in sort of the regime structure that we're seeing in deal-making process and something that is quite new. I think there are two reasons why take-privates have been accelerating.
First is just an outlet for dry powder that has been building for several years in the PE space and now I think totals more than $2.6 trillion, which is a historic record. And then the second is really just a sort of consequence of the IPO boom in 2020 and 2021, where you saw a large amount of companies, nearly 4,000 companies going public globally when policy rates were now zero and valuations were, let's say, different than what they are today. And since then, the rate hike cycle has really compressed a lot of those valuations, drawing the attention of these PE firms sitting on dry powder who think that they can make either sponsored or strategic deals that would help their portfolio companies.
Looking through the briefing book here, I see you spent some time on IPO activity. Will that increase? So IPOs have been relatively soft, I think disappointing.
Some people who have expected more revival in IPO activity, more akin to what we've seen in M&A. The market is still modest and there has been a single digit increase year on year from 2023, but we're still below pre-pandemic ranges. A screener from PitchBook shows that there are a growing number of companies, that candidate companies for the IPO process, but they're still being built up and there's still a lot of value that's still yet to be created there.
And talking to some of our clients and hearing some anecdotes around the market, what it sounds like is what we need is interest rates to keep coming down, but also animal spirits to revive. And it would take, I think, another couple of really mega deals with successful IPOs this year that could unlock a lot of the animal spirits and encourage a lot of firms to come to market. Okay.
So a lot there on the IPO space to be mindful of over the course of 2025. Let's close out on risks, Paul. With respect to investors, businesses, what should they be aware of in the way of risk?
Right. So in some ways, 2025 begins a lot of ways that 2024 has begun with a lot more optimism on the revival of the deal-making space. One thing that has been quite good is the rise in M&A activity, but some other spots like IPO have been more sluggish, let's say.
So I think there's a couple of risks that investors and business owners should be aware of going forward. First is what direction animal spirits are going. So while animal spirits by some surveys show that business optimism has really increased following the election and the uncertainty all that can bring, some consultancies like BCG has a deal-maker sentiment index that's still below average, showing that there is still a degree of caution in the market, I think, from a lot of investors.
And so what I think we need for the market to unlock, as I referred to in the IPO question, is really revival of animal spirits, business confidence for investors to bring companies on the market and for transactions to clear. The second is that the interest rate regime remaining higher for longer. I mentioned that the CPI prints have been a little higher than expected, which has kept, I think, the Fed language a little less dovish than one would have hoped.
Interest rates were one of the primary reasons, or at least the high degree of interest rates are one of the reasons that activity has slowed since 2022. So if inflation continues to remain high and there are more pressures from inflationary policies like tariffs come to board, that could also slow activity, but that's a big unknown for policymakers as well as investors. And thirdly, regulation is a risk.
I mentioned that a lot of businesses see the new administration bringing a more business-friendly environment, but a lot of activity nowadays in the M&A space and some IPOs too can be quite complex, require a degree of scrutiny, especially when it comes to the AI space, which is still relatively new and is getting the attention of lawmakers when it comes to regulation. One of the places outside of the U.S. that has been, I think, taking the initiative is the European Union with its landmark AI Act. So how it can affect cross-border transactions and how it could perhaps influence how the U.S. looks at AI transactions are still yet to be seen, but that's given how much activity and how much optimism is around AI, I think the changing regulatory environment is something that investors should watch out for.
It's always good to have an inventory of risk consideration. So a great point there to end on, Paul, and thank you for joining us, spending some time with our listeners, our clients for the update on the deal-making landscape here in 2025. My pleasure.
Thanks for having me. Thank you for tuning in. Be sure to visit UBS.com slash studios to view the entire UBS studios suite of podcast channels along with our video offerings, such as UBS Trending.
You can also follow us on Instagram for content highlights at UBS Trending. UBS Studios is part of the UBS Chief Investment Office within UBS Global Wealth Management. Visit UBS.com slash CIO to view the latest research.
UBS Chief Investment Office's investment views are prepared and published by the Global Wealth Management Business of UBS AG or its affiliate, UBS. This material has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is published for informational purposes only. As a firm providing wealth management services to clients globally, UBS AG and its subsidiaries offer both investment advisory services and brokerage services.
Investment advisory services and brokerage services are separate and distinct, differ in material ways and are governed by different laws and separate arrangements. In the USA, UBS Financial Services, Inc. is a subsidiary of UBS AG and a member of FINRA SIPC. For information, please visit our website at UBS.com forward slash working with us.
For a full legal disclaimer applicable to the independent investment views produced by UBS, please visit our website at UBS.com forward slash CIO dash disclaimer.