In each issue of Owner to Owner, we review aspects of the business environment on three fronts:

• Overall economy
• Credit markets
• Private equity (PE) and mergers and acquisitions (M&A) markets

The following article examines the state of the economy entering 2025, with anticipated pro-business policies under the Trump administration; uncertainty around tariffs and inflation; and compelling opportunities for new deal activity and exits.

The economy

According to the second estimate by the U.S. Bureau of Economic Analysis, U.S. real gross domestic product (GDP) expanded at a quarter-over-quarter annualized rate of 2.34% in fourth quarter 2024. This marks a deceleration from the 3.1% real GDP growth recorded in third quarter 2024, reflecting a decrease in both investments and exports, both of which were partly offset by an acceleration in consumer spending.

The personal consumption expenditure component of GDP – which drives 70% of GDP over the long run – advanced 4.2%, its highest annualized growth rate since first quarter 2023, with increases in both services and goods. As of February 14, 2025, the Atlanta Fed GDPNow Index forecasts fourth quarter real GDP growth of 2.3%, reflecting strong gains in nonfarm payrolls and wage growth.

Meanwhile, small business optimism, according to the NFIB Small Business Optimism Index, fell by 2.3 points in January to 102.8. This was the third consecutive month above the 51-year average of 98 and the second-highest reading since February 2020.

Expectations for economic growth, lower inflation, and positive business conditions have increased in anticipation of pro-business policies under the Trump administration. Small business optimism experienced a similar increase during President Trump’s first term, where optimism remained elevated given Trump’s pro-business policies, particularly the Tax Cuts and Jobs Act in 2017.

In regard to unemployment, the U.S. unemployment rate remained at or above 4% for the ninth consecutive month. January’s reading of 4.0% marks its longest streak above 4% since the beginning of 2018 (excluding the COVID-19 pandemic period). While the unemployment rates remain stubbornly above 4%, nonfarm payrolls growth continues to surprise to the upside. The economy added 143,000 nonfarm jobs in January 2025, following 307,000 jobs added in December, which was the highest monthly addition in jobs since January 2023.

From 2024 to 2026, the Federal Reserve estimates real GDP growth of 2.8% in 2024, 2.1% in 2025, and 2% in 2026, down from a 2.9% real GDP growth rate in 2023. As such, the Fed does not currently forecast a recession over the next three years. Macro data suggest the economy is expected to remain in expansion territory, which sets a positive backdrop for companies’ earnings growth.

However, the recent announcements by the Trump administration to impose tariffs on imported steel and aluminum, with reciprocal tariffs on all imports from U.S. trading partners also a possibility, present upside risk to inflation and the probability of lower fed funds rate cuts.

As it relates to monetary policy, in September 2024, the Federal Open Market Committee (FOMC) joined global central bank peers by beginning its interest rate-cutting cycle. Since then, the FOMC reduced the fed funds rate by 100 basis points (bps)¹ to a target range of 4.25% to 4.5%. As of the end of 2024, global central banks cut rates 195 times vs. 31 rate hikes, a sharp reversal from 84 rate cuts and 161 rate hikes in 2023.

As of February 28, the fed funds futures curve is pricing in that the fed funds rate ends 2025 at 3.6%. This implies a target range of 3.5% to 3.75%, which is slightly below the Fed’s terminal rate guidance of 3.9% estimated in its December 2024 economic projections release.

There is much underway as we progress through 2025 – rising tensions in the Middle East, ongoing economic uncertainty in China, and President Trump’s policies (tariffs, immigration, and tax cuts), to name a few – and we will be watching inflation and global growth developments closely.

The credit market

It appears the FOMC has adopted a “wait-and-see” disposition, as inflation remains stubbornly above the Federal Reserve’s 2% target (although down markedly from post-pandemic levels). Moreover, uncertainty remains as to the potential inflationary effects of the Trump administration’s economic policies. The widely referenced CME FedWatch tool, which uses federal funds rate futures contracts to calculate the probability of forthcoming FOMC decisions, suggests the market anticipates the FOMC continuing to hold rates steady at its March and May 2025 meetings.

While the FOMC will continue to use data to assess the timing and pace of monetary policy adjustments, which influence short-term rates, the outlooks for future growth and inflation are more impactful on longer-dated Treasury yields.

As shown in the nearby chart, the yield curve for U.S. Treasuries, which is a graphical representation of interest rates on bonds with varying maturities, returned to an almost normal upward-sloping curve as 2024 progressed. This followed a two-year period of inversion, whereby current inflation and the Fed’s hawkish response drove the two-year Treasury yield above the 10-year yield, while market participants anticipated more moderate longer-term inflation and growth.

Short-term yields have since fallen, influenced by declining inflation and the Fed’s decision to cut rates, while longer-term yields increased with more optimistic future economic growth expectations. As a result, the cost of short-term borrowings – particularly those with credit facilities pegged to floating rate benchmarks – has eased.

Corporate spreads reflect how the market assesses risk and credit quality by measuring the additional return demanded for investing in riskier securities. The nearby chart indicates that the bond market is gaining confidence in corporate creditworthiness and stable or improving economic conditions. Spreads for corporate bonds across various rating classes narrowed through December, reaching a three-year low. As of December 31, 2024, spreads for high-yield, BBB, and A bonds were 2.8%, 1.1%, and 0.8%, respectively.²

The nearby chart shows the historical trend of commercial and industrial (C&I) loans outstanding, as well as the net percentage of U.S. banks adjusting their credit standards for loans to large and middle-market firms according to the Federal Reserve’s Senior Loan Officer Opinion Survey (SLOOS). Note that the SLOOS data corresponds to activity in the prior quarter (that is, a report released in October represents the activity from July to September).

As illustrated, during economic uncertainty or decline, banks usually tighten their lending standards and increase the cost of borrowing, leading to reduced loan supply and demand in the following months. During fourth quarter 2024, banks reported a net 6.2% increase of standards, while C&I loans increased by $28 billion during the same period.

While most lenders reported about the same C&I loan demand as in the previous quarter, banks reporting weaker C&I loan demand equaled banks reporting greater demand for the first time since October 2022. While bank and borrower caution prevails, driven by an uncertain economic outlook, the results indicate a steady and gradually improving borrower and banker optimism. Warren Buffett would say that uncertainty is the friend of a buyer of long-term values. Similarly, we are actively expanding our corporate loan portfolio while focusing on sound credit opportunities.

The private equity and mergers and acquisitions markets

2024 was a strong year for both PE and M&A. An increasingly accommodative financing environment in 2025 should continue to create favorable tailwinds for compelling opportunities for new deal activity and exits. Fund managers are operating with cautious optimism as the U.S. transitions to a new administration.

U.S. PE dealmaking in fourth quarter 2024 saw a 7.7% increase in deal value and 13.3% in deal count vs. the prior quarter. Stabilized inflation and a more positive macroeconomic outlook led year-over-year deal value to increase by 19.3% to $838.5 billion and deal count to rise by 12.8% to 8,473.

An additional key growth driver was the resumption of deals exceeding $1 billion in value, which accounted for 36.8% of all PE-backed deals in 2024. Information technology (IT), particularly software, stood out as a favored sector among general partners (GPs) in 2024. IT deal value increased by 30.7% year over year and is only behind business-to-business (B2B) in share of PE deal activity. The healthcare sector experienced a steady rebound in 2024 after several years of regulatory headwinds and high valuations that had dampened dealmaking.³

Entering 2025, much of the PE industry is optimistic about what changing macroeconomic conditions will bring. Anticipated interest rate cuts, GDP growth, softened regulations by the Federal Trade Commission, and lower capital gains tax rates are setting the stage for increased deal activity.⁴

After two years of declines, U.S. PE exit activity began its recovery in 2024: 1,501 exits totaling $413.2 billion in value represent year-over-year increases of 16.6% and 49%, respectively, and have surpassed pre-COVID-19 averages. This rebound in exit value reflects the trend of PE sellers bringing their highest-quality assets to market while holding off portfolio companies that require more value creation.⁵

Exit activity is expected to continue to recover in 2025. The lower exit activity over recent years has created a backlog of companies that GPs are eager to sell. U.S. PE managers are holding an eight-year inventory at the current exit pace. In addition, lower tax rates from the Trump administration may incentivize business owners to sell their companies.⁶

PE fundraising fell off in 2024, with the amount of capital raised dropping by over $100 billion year over year, from $395 billion in 2023 to $286 billion in 2024. Fund count decreased by over half, from 686 to 311. While the uptick in deal and exit activity should have a positive impact on fundraising, it will take some time for the effects to trickle down.

As PE funds are taking longer to raise, the median time to close a fund has gone from 11 months in 2022 to 16.2 months in 2024. Mega-funds ($5 billion and more) continue to bolster fundraising, accounting for 43.7% of all capital raised in 2024. However, a recent survey of large limited partners by Private Equity International (PEI) reflected a sense of optimism for better fundraising in 2025 due to stable interest rates and the ability of PE firms to drive mechanisms for distributions, including continuation funds, GP-led secondaries, and minority recapitalizations.⁷

Through third quarter 2024, North American M&A had already nearly surpassed that of 2023, with deal value of $1.5 trillion across 13,509 deals. When annualized, 2024 deal value is expected to exceed 2023 by approximately 30%.⁸

In the U.S., the M&A outlook is positive, driven by lower interest rates, strong equity markets, resilient debt markets, and a narrowing valuation gap – all of which are expected to create a favorable climate for dealmakers in 2025. With the stability of the macroeconomic environment, corporations are likely to view M&A as an integral part of their holistic growth strategies, leading to an increase in M&A activity.⁹

Conclusion

There is much underway as we progress through 2025 – rising geopolitical tensions, ongoing economic uncertainty in China, and the new Trump administration’s policies, to name just a few – and we will be watching inflation and global growth developments closely.

Meanwhile, in the credit markets, the FOMC is anticipated to continue holding rates steady at its March and May 2025 meetings. Inflation remains above the Fed’s 2% target, and uncertainty persists around the potential inflationary effects of President Trump’s economic policies. Amid gradually improving borrower and banker optimism, the bond market is gaining confidence in corporate creditworthiness and stable or improving economic conditions.

Finally, fourth quarter 2024 and the beginning of 2025 found much of the PE industry optimistic about the potential for increased deal activity amid changing macroeconomic conditions. A positive M&A outlook in the U.S. is expected to lead to an increase in activity.