M&A Dealmakers Facing Recession Fears—Again

The middle-market dealmaking community has been no stranger to recession talk in recent years. Debate over whether the U.S. would enter a recession or achieve the coveted soft landing raged in 2022 and 2023, following post-COVID inflation, interest rate hikes, supply chain turmoil and a variety of other factors. As a result, investors shifted their market strategies in preparation for a possible market downturn.

While the U.S. has managed to avoid a recession since the COVID-19-triggered recession of early 2020, renewed fears have resurfaced as a trade war threatens an inflation spike.

“Higher tariffs are likely to boost consumer crisis,” wrote Goldman Sachs economists in a warning issued Sunday, March 31, according to CNN reports. The bank increased its inflation forecast, predicting a 3.5% rise by the end of the year, up from its previous estimate of 3%.

As of the end of the first quarter, Goldman says there is a 35% chance of a recession this year, up from its previous prediction of 20%. JPMorgan Chase also increased its recession risk to 40% from 30%, according to the Wall Street Journal. 

Middle-Market M&A Reacts

The middle-market M&A ecosystem is feeling the recession pressure.

A March LinkedIn survey conducted by ACG found 69% of respondents believe it is either likely or very likely the U.S. will enter a recession by 2026. On the other hand, 19% said a recession is somewhat unlikely, and 12% said it is very unlikely.

A March LinkedIn survey conducted by ACG found 69% of respondents believe it is either likely or very likely the U.S. will enter a recession by 2026.

Today, many dealmakers continue to take a cautious wait-and-see approach to the market, with expectations for an increase in deal volume and a more favorable regulatory environment keeping optimism steady.

Tuan Nguyen, an economist with RSM US LLP, told ACG’s GrowthTV at the start of the year that economic conditions, including strong GDP growth and a robust labor market, signaled a strong market for 2025, with a 30% chance that the economy could even outperform forecasts.

Even as we head into the second quarter, RSM US LLP’s optimism persists. In his daily Market Minutes note on April 1, RSM chief economist Joe Brusuelas suggested that political uncertainty and trade tariffs are not enough to drive the U.S. into recession territory. “Instead, we think that the economy is experiencing a late-cycle slowdown and that growth should ease to at or below 1.5% in the current quarter,” he wrote.

Like major Wall Street banks, RSM US LLP increased its probability of a recession in the next 12 months to 20% from 15% at the start of the year. Even so, lessons learned by dealmakers who navigated recession concerns in recent years could help maintain M&A investors’ heightened expectations for deal activity through 2025.

Keeping Optimism Buoyed

A look back at how the dealmaking community responded to recession fears reveals shifting M&A strategies aimed at keeping deal volume flowing through market uncertainty.

With a chilly market wavering investor confidence through 2022 and 2023, investors embraced an opportunity to get creative with their dealmaking. That meant new deal structures to keep both buyer and seller expectations in-line, said Palladium Equity Partners Director of Business Development Meahgan O’Grady Martin, in a 2022 interview with Middle Market Growth.

She pointed to cash up front and contingencies around continued performance of an investment target, such as earnouts, to ease fears over how companies would navigate a possible recession. Due diligence, experts noted in 2022, would also be an ever-more important component to M&A.

Facing higher costs of capital, investors embraced add-on opportunities; uncovering recession-resilient niches of the market also became a key strategy to maintaining deal flow (and optimism) at the time.

The same holds true today, experts told Middle Market Growth, with analysts pointing to healthcare and blue-collar sectors like manufacturing and residential services as particularly attractive in challenging economic times.

With emerging technologies like artificial intelligence increasingly front-and-center in M&A workflows like deal sourcing and due diligence, investors in 2025 have more tools at their disposal to weather economic and political storms, whether a recession materializes or not.

Carolyn Vallejo is ACG’s Digital Editor.

Middle Market Growth is produced by the Association for Corporate Growth. To learn more about the organization and how to become a member, visit www.acg.org.