How Rising Interest Rates and Government Debt Are Reshaping M&A and Valuations

The first half of 2025 M&A landscape paints a picture of cautious activity punctuated by high-value deal flow. Despite a 9% drop in transaction volume, global deal values are up 15%, reflecting concentration in larger deals and megadeals (>$1bn, >$5bn) particularly in the Americas and technology, energy, and finance sectors. India and the Middle East showed strong volume gains (18% and 13%), while Europe, Middle East and Africa (EMEA) registered declines in both volumes and values. [1]

One of the earliest warning flags is the compression in valuation multiples. After peaking at ~14.3× in September 2024, median global EV/EBITDA multiples have receded to ~10.8× in 2025, approximately 14% below Q4 2024 levels. Though the US has managed slight multiple growth, Europe and Asia-Pacific are seeing material retrenchment. These trends suggest heightened risk aversion and discounting of cross-border exposure and tariff risks. [2]

Kicking pressures up a notch, government debt and rising long-term rates are reshaping the cost and feasibility of deals. OECD countries are contending with sovereign debt service equal to ~3.3% of GDP in 2024—surpassing defense spending—and the expectation that much of the outstanding sovereign and corporate debt will need refinancing in the next 3–5 years. [3] For M&A firms, especially in leveraged or capital-intensive sectors, this raises execution risk and elevates sensitivity to financing costs. [4]

Private equity and principal investors are under the microscope. With over 30,000 portfolio companies, nearly half held since pre-2020, PE exits have slowed markedly. Exits in Q1 2025 rose modestly to 903 deals from 820 a year prior, with exit value doubling (~$302bn from ~$166bn), yet still lagging what would be required to unlock capital and portfolio refresh. Elevated interest rates and regulatory uncertainty are exacerbating this challenge. Dominant PE players are responding by leaning into AI for operational improvement, exploring private credit and alternative funding structures, and focusing on similarly resilient sectors. [6]

Strategic lessons emerge. Dealmakers leaning into deal quality, with an emphasis on high cash-flow, strong management, and scalable business models, are being rewarded. Geography matters: domestic/intra-regional deals are preferred over cross-border complexity. Thematic focus—especially around AI, infrastructure, and resilient sectors—is helping buyers to act decisively despite macro uncertainty. In practice, value creation plans need clarity from the outset, with scenario stress tests, disciplined price-setting, and execution agility now integral to deal success. [1] [6]

Looking into H2 2025, risks remain—tariff policy shifts, long-term rates stuck high, and IPO markets still uneven. But opportunities exist for well-capitalized buyers with sectoral foresight (tech, power/utilities, defence) and geographic flexibility. PE and private credit will continue to be critical leverages. The sea change may not be in volume recovery immediately, but in recalibration—of pricing, risk tolerance, and growth pathways.