Podcast Summary: Big Debates: How Will M&A and IPOs Drive Markets in 2025?

Podcast Information

• Title: Thoughts on the Market
• Host/Author: Morgan Stanley
• Episode: Big Debates: How Will M&A and IPOs Drive Markets in 2025?
• Release Date: January 23, 2025

In this episode of "Thoughts on the Market," Morgan Stanley delves into the evolving landscape of mergers and acquisitions (M&A) and initial public offerings (IPOs), exploring their potential impact on the markets in 2025. Hosted by Michelle Weaver, alongside experts Mike Cypers and Ryan Kenny, the discussion navigates through the resurgence of M&A activity, the IPO market revival, policy influences, and the implications for retail investors.

1. Introduction to the M&A and IPO Landscape

Michelle Weaver opens the discussion by highlighting the significant decrease in global M&A activity in 2023, marking the lowest levels in over three decades. However, signs of recovery began in 2024, prompting a deeper examination of the factors driving this resurgence and the sustainability of retail investing in the upcoming year.

"2023 saw the lowest level of global M and A activity in at least 30 years, but we've started to see activity pick up in 2024."
— Michelle Weaver [00:14]

2. Drivers Behind the M&A Resurgence

Mike Cypers identifies a confluence of factors contributing to the uptick in M&A activities:

• Pent-Up Activity: A buildup of deferred transactions during the previous subdued periods.
• Equity Market Growth: Expansion of equity markets globally, providing more opportunities for transactions.
• Stable Financing Conditions: Availability of broad financing with meaningful issuance, supported by tight credit spreads and stabilizing interest rates.
• Improved Liquidity: Enhanced liquidity conditions reducing bid-ask spreads, making transactions more feasible.

"It's a combination of factors in the context of a lot of pent up activity and a growing urge to transact after a very subdued period."
— Mike Cypers [00:45]

Cypers also emphasizes the positive outlook for 2025, despite recent market volatility, attributing confidence to the potential changes under a new administration that may foster a more favorable antitrust environment.

"We are quite positive here in '25 as we think about scope for continued surge of activity."
— Mike Cypers [02:00]

3. Impact of Rising Interest Rates

Michelle Weaver raises concerns about the significant rise in interest rates since December and their potential to slow down M&A activity.

"We've seen rates rising pretty substantially since December. Does that throw a wrench into this at all or do you think we see more stabilization there?"
— Michelle Weaver [02:06]

Mike Cypers acknowledges the risk of a slowdown but remains optimistic, citing other supportive factors that could continue to drive M&A activity forward.

"I think it could be a little bit of a slowdown that would be the risk here. But... there are a lot of factors that can be very helpful in terms of driving a continued pickup in activity."
— Mike Cypers [02:09]

4. Role of Financial Sponsors in M&A

Diving deeper, Mike Cypers discusses the pivotal role of financial sponsors in M&A activity. With approximately $4 trillion in capital poised for deployment, sponsors have significant "dry powder" that has been lying idle due to previous market conditions.

Key Points:

• Capital Deployment Pressure: Sponsors face declining returns within funds and looming expirations of dry powder by the end of 2025.
• Portfolio Realization: Sponsors are eager to provide liquidity back to their limited partners (LPs), addressing strained client relationships.
• Enhanced Fundraising Outlook: Successful capital deployment can improve the fundraising environment for private equity funds.

"The return clock is ticking. The lack of deployment is hurting returns within funds... sponsors won't get some of the performance fee economics that come through to them on that capital."
— Mike Cypers [02:33]

This mounting pressure is expected to catalyze a surge in M&A activities from both buy-side and sell-side sponsors.

5. IPO Trends and Resurgence

Ryan Kenny provides an overview of the IPO landscape, projecting a strong rebound in equity capital markets (ECM) driven by improved market conditions:

• Historical Context: In 2024, M&A volumes were approximately 40% below three-decade averages, while ECM was 50% below.
• Current Indicators: Strong equity markets and low volatility are setting the stage for renewed IPO activity.
• Recent Performance: Several significant IPOs in the previous year performed well, with Q4 2024 showing a 50% year-over-year increase in ECM volumes.

"With IPOs, we are also expecting a significant resurgence off of a low base."
— Ryan Kenny [04:27]

The improvement in ECM activity is closely tied to the favorable conditions similar to those driving M&A resurgence.

6. Policy Influences: Antitrust Regulation under the Trump Administration

A critical segment of the discussion focuses on the anticipated impact of policy changes under the incoming Trump administration, particularly concerning antitrust regulations.

Ryan Kenny outlines the expected shift from the Biden administration's stringent and unclear antitrust policies to a more "normal" regulatory environment. This normalization is anticipated to reduce uncertainties surrounding M&A transactions, thereby boosting corporate confidence to pursue deals without the fear of prolonged legal challenges.

"We expect there will still be some deals like a challenge, but it will operate under a more historical norms."
— Ryan Kenny [05:34]

This regulatory clarity is expected to reinvigorate large-cap M&A deals, which had been significantly hindered under previous policies.

7. Catalysts Beyond Political Changes

Beyond policy shifts, Ryan Kenny identifies additional catalysts that investors should monitor in 2025:

• Macro Catalysts:

  • Clarity on tariff and immigration policies.
  • Impact of these policies on GDP growth.
  • Stabilization of the interest rate path, even without further rate cuts.

• Structural Catalysts:

  • Advancements in AI, technology, biotech, healthcare, and energy transition.
  • Reshoring and strategic geographic expansions in a multipolar world.

These factors collectively contribute to a conducive environment for both M&A and IPO activities.

"Structural catalysts that are really critical this cycle are the need for AI capabilities, innovation in tech, innovation in biotech, healthcare, the energy transition..."
— Ryan Kenny [07:37]

8. Outlook for 2025 and Beyond

Ryan Kenny presents an optimistic outlook for 2025 and beyond:

• 2025 Projections:

  • M&A Announcements: Expected to double from a low base, with a 50% year-over-year increase.
  • ECM Volumes: Significant rebound anticipated, continuing the upward trend from 2024.

• Long-Term Forecast:

  • Initiation of a multi-year capital markets growth cycle.
  • Larger deal sizes and higher deal counts driven by pent-up demand and a robust economy, surpassing the scale of the 2021 capital markets cycle.

"We think this is the beginning of a multi year capital markets growth cycle with bigger deal sizes and more deal count than average."
— Ryan Kenny [08:43]

This sustained growth trajectory positions the markets for a vibrant and dynamic period, underpinned by strong economic fundamentals and strategic corporate actions.

9. Implications for Retail Investing

Concluding the discussion, Mike Cypers explores the implications of the anticipated rebound in M&A and IPO activities for retail investors:

• Increased Market Engagement: More IPOs and corporate actions provide retail investors with a broader array of investment opportunities.
• Enhanced Trading Volumes: Greater investor engagement is expected to boost trading volumes across stocks and options.
• Margin and Securities Lending: Increased confidence may lead to higher margin lending and securities lending activities, benefiting retail brokerage services.

"Overall, a supportive macro backdrop with rebound and capital markets activity... should be helpful in terms of bringing more investors into the markets, including retail investors."
— Mike Cypers [09:43]

This positive environment is likely to foster greater participation and activity within the retail investment community, contributing to a more vibrant and liquid market.

10. Conclusion

The episode "Big Debates: How Will M&A and IPOs Drive Markets in 2025?" provides a comprehensive analysis of the factors influencing the resurgence of M&A and IPO activities. With improved market conditions, supportive policy environments, and strategic corporate maneuvers, Morgan Stanley experts project a robust and sustained growth trajectory for the capital markets in 2025 and beyond. Retail investors stand to benefit from increased market engagement and a broader spectrum of investment opportunities, signaling a promising outlook for the financial landscape.

Notable Quotes:

• "We are quite positive here in '25 as we think about scope for continued surge of activity."
  — Mike Cypers [02:00]

• "We expect there will still be some deals like a challenge, but it will operate under a more historical norms."
  — Ryan Kenny [05:34]

• "We think this is the beginning of a multi year capital markets growth cycle with bigger deal sizes and more deal count than average."
  — Ryan Kenny [08:43]

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