Brighter economic outlook to spark pent-up buyer demand

By Jon Wilde

The latest reduction in UK interest rates is expected to further ignite the pent-up demand of investors to buy companies.

With the base rate having been lowered to 4.5% as the government strives to boost economic growth, acquisitions have become more affordable due to the cheaper cost of borrowing. This commitment is further reinforced by the UK having exhibited the strongest growth rate in the G7 in 2024.

Additionally, fears of steep Capital Gains Tax increases have not materialised, which means sellers can benefit from historically low tax rates when exiting their business. With economic stability on the horizon, acquirers are showing increased willingness to commit to deals, creating an optimal environment for sellers.

One of the most encouraging signs for the market has been the UK economy’s unexpected growth in the final quarter of 2024. Defying predictions, GDP rose faster than expected, driven by a rebound in consumer spending, business investment and easing inflation pressures. This strong performance has injected fresh confidence into the economy, with investors and corporate buyers now more willing to commit to acquisitions. For business owners, this momentum means a more active M&A market and stronger valuations.

Deal activity in the market as a whole has plateaued since the resurgence from Covid in 2021 and 2022, although KBS Corporate has bucked the overall trend by achieving a more positive trajectory.

As the UK’s No.1-ranked mid-market corporate sales adviser for eight consecutive years (source: LSEG), we completed 8% more transactions year-on-year in 2024 – and nearly three times as many as our closest competitor.

And yet the market still resembles a coiled spring, with the confidence of investors now returning along with an eagerness to expend the ‘dry powder’ accumulated by private equity funds during a time of geopolitical and economic uncertainty.

PE firms are keen to transact, having waited for market conditions to become conducive. They have typically been playing a longer game to ensure growth targets within their existing portfolio are met, holding companies for longer than the norm, but investors inevitably demand returns and thus offloading companies facilitates the raising of new capital.

This is in addition to the estimated $3.7trillion of ‘dry powder’ at the start of 2025 which was waiting to be invested as the clock ticks down on PE funds’ lifecycles, setting the stage for some frenzied private equity investment during the course of 2025.

Meanwhile, a poll of 200 senior UK-based private equity professionals has found that 81% viewed the UK as a “more attractive” or “significantly more attractive” investment proposition compared to other geographic areas.

All things considered, 2025 is shaping up to be a year in which we see a significant escalation in deal volumes – especially to private equity firms which offer company shareholders important flexibility within the range of options available.