Is deal activity on the rise? 3 signs we see now

Markets maintained a tenuous holding pattern this week as they monitored the escalating conflict between Iran and Israel. Oil (+3.6%) prices topped $78/barrel for the first time since January amid fears of war escalation in the Middle East, with ongoing concerns about flows from Iran and threats to vessel traffic in the Strait of Hormuz. While the markets are on edge, it seems like crude prices have some more room to rise before they start to cause real friction for the U.S. economy.

The June FOMC meeting met expectations. The Federal Reserve left rates unchanged and kept messaging consistent: Tariff-driven economic uncertainty and inflation risks complicate its efforts to ease monetary policy. It still expects that, all else equal, it will lower interest rates by 50 basis points (bps) this year. Treasury yields are relatively unchanged, with no tenor moving more than 2 bps.

U.S. equities are flat headed into Friday trading following yesterday’s holiday. The tech-heavy NASDAQ 100 (+0.4%) eked out a gain alongside small caps (Solactive 2000 +0.4%).

While most eyes are watching to see how far the conflict in the Middle East might escalate, and whether or not the White House will decide to intervene directly, we have been seeing some signs that the recovery in dealmaking and capital market activity may be gaining speed.

Spotlight

Coming into this year, we were expecting a meaningful resurgence in dealmaking activity fueled by the Trump administration’s pro-business, deregulatory agenda. And there were green shoots to start the year: Global M&A activity was up 17% year-over-year in Q1. But tariff-induced uncertainty curtailed any momentum. However, we are now starting to see three distinct drivers that could accelerate the recovery.

1. Artificial intelligence

Artificial intelligence is rapidly becoming a catalyst for transformative change in the M&A and IPO landscapes. Generative AI is reshaping the M&A process, with about one-in-five companies currently utilizing AI, and expectations are that more than half will integrate it by 2027, according to Bain. AI’s ability to improve various stages of dealmaking—from sourcing and screening to diligence and integration—is raising the standard for competitors. Those leveraging AI are gaining a competitive edge, making it essential for others to adopt these technologies or risk falling behind in the fast-paced environment. 

The broader tech ecosystem is also focused on AI acquisitions to gain and maintain a strategic advantage. Meta’s $14.8 billion Scale AI deal is just the latest testament to the rise of AI tie-ups. Meta finalized a multibillion-dollar investment in Scale AI and recruited the startup’s CEO to join its AI efforts.

OpenAI is acquiring io, a startup co-founded by Apple veteran Jony Ive, in a nearly $6.5 billion all-stock deal to develop AI-powered devices. This move highlights the transformative potential of AI in M&A, as tech companies increasingly acquire AI startups to enhance their offerings and leverage their experience.

CoreWeave, an AI cloud-computing startup, has experienced a remarkable post-IPO rally and is now up over 280% as a public company. It has gained significant traction due to its multibillion-dollar contracts with Nvidia, OpenAI, Microsoft and other major companies propelling AI. CoreWeave expects capital expenditures of $20 billion to $23 billion this year to expand its AI infrastructure and data center capacity.

AI deal value so far this year exceeds $140 billion, crushing last year’s ~$25 billion total.

We are confident that AI will continue to drive significant productivity gains for businesses, consumers and the economy as a whole. The integration of generative AI into M&A processes and the strategic urgency to stay at the leading edge of AI should propel dealmaking activity.

2. Financial sector deregulation

While tariffs have dominated headlines, a significant conversation around bank deregulation is unfolding, poised to spur M&A activity through increased lending. Following the Global Financial Crisis, regulations were tightened to strengthen bank balance sheets and prevent another collapse. However, these regulations have become increasingly stringent over time. In the wake of the March 2023 banking crisis and the proposed Basel III Endgame rules, U.S. banks have built up capital amid regulatory uncertainty. Now, with the new administration signaling a potential easing of these regulations, banks are expected to release some of this built-up capital.

Treasury Secretary Scott Bessent has emphasized the importance of bank deregulation to unlock non-government lending and stimulate private sector growth. Deregulation is seen as the next phase of the administration’s agenda. The latest move plans to reduce the enhanced supplementary leverage ratio (eSLR) by up to 1.5 percentage points. The rule requires large lenders to hold a certain amount of capital against their investments in Treasuries. With an easing of this rule, banks may have more flexibility to lend, as they are required to hold less capital against their leverage exposure. As banks gain more balance sheet capacity, they are likely to use it for capital distributions to shareholders, M&A activity for themselves and lending growth for the broad economy.

The ongoing dialogue around bank deregulation presents a multifaceted opportunity for the U.S. banking sector. As regulatory requirements soften, banks are positioned to deploy significant excess capital, enhancing shareholder returns, loan growth and M&A activity. This deregulation could lead to improved profitability through increased capital markets activity and reduced regulatory expenses, with preferred stock and equities both likely to benefit.

3. Private equity firms are looking for alternative avenues to exit

The private equity market is currently navigating a complex landscape marked by a dichotomy between investments and exits. On the investment side, the industry is flush with near-record levels of dry powder, with approximately 25% of it being over four years old. Conversely, exit activity is at its lowest since the Global Financial Crisis, with distributions as a percentage of net asset value (NAV) at multi-year lows. This dynamic isn’t surprising, given the elevated uncertainty over the past three years characterized by the rate shock in 2022, and heightened economic and policy uncertainties. This has contributed to muted IPO and strategic M&A activity, as well as widening bid-ask spreads in private markets, leading to a negative balance of distributions to contributions.

Despite these challenges, 2024 saw the industry come back into better balance with the ratio of distributions to contributions breaking even. However, the outlook for traditional dealmaking is still clouded by prolonged uncertainty, prompting PE firms to explore alternative avenues for exits.

That said, secondaries have come into focus. Global secondary volume surpassed $160 billion in 2024, a roughly 45% increase from 2023. Secondaries provide diversification by allowing investors to acquire interests in existing funds across different vintage years and managers, mitigating risks associated with single-fund investments. They may also bypass the early-stage “J-Curve” effect, potentially allowing investors to see returns sooner by investing in more mature funds, often at a discount to NAV.

As the median holding period for buyout-backed exits rises and global buyout distributions remain low, focusing on alternative exit strategies will be crucial for PE firms seeking to navigate this evolving landscape. Even if traditional deal activity remains subdued, the potential for secondaries offers a promising avenue for liquidity and value creation.

The current dealmaking and capital market environment seems to be heating up. AI innovation, deregulation and private equity’s need to generate liquidity are promising catalysts for a continued revival. As AI continues to drive productivity gains and competitive advantages, deregulation unlocks lending potential, and secondaries offer liquidity and diversification, investors are well positioned to capitalize on these potentially transformative trends.

Reach out to your J.P. Morgan team to discuss how these themes might impact your portfolio.