How 2025 Could Unlock Growth for the UK’s Mid-Market Businesses

By James Hodkinson   

At the start of 2024, there was widespread anticipation¹ that deal volumes would pick up, but as we moved through the year, this uptick wasn’t as strong as expected. A combination of higher interest rates, political uncertainty, slower economic growth, and now the promise of higher taxes for businesses have all placed a strain on the UK’s mid-market.  

In a year characterised by a number of key elections across the globe, this created particular uncertainty for businesses. In the UK, Labour’s win in July and the build up to its first Autumn Budget in October led² to drops in business confidence as widespread tax rises and budget cuts were expected. This, coupled with the build up to the US election and subsequent win for Donald Trump created unease among businesses, leading to a more cautious trading environment. This caused many businesses to delay key investment and strategic decisions as many waited it out for more favourable and stable economic conditions. 

Despite these headwinds, in the final quarter of 2024 we saw an uptick in deal activity, with deal size and quality picking up. Much of this momentum was driven by M&A and refinancing transactions, as opposed to restructuring deals, suggesting that the more distressed deals we’d see during economic downturns are beginning to ease. As we enter the first quarter of 2025, confidence seems to be growing across the market and many, once again, are expecting an uptick in deal volumes. The question now is: will it materialise this time? 

Factors affecting businesses in 2025 

I anticipate that this optimistic outlook to continue throughout 2025, with several factors influencing the way businesses operate. For example, it is expected that interest rates will continue to gradually decline this year, and financial markets are predicting that there will be two quarter-point rate cuts this year³. This will create a more favourable operating environment for businesses, reducing the cost of borrowing which, in turn, can lead to more businesses leveraging external finance to fund M&A activity. 

However, as tax rises announced at the Autumn Budget begin to come into effect, particularly the increase in national insurance rates for businesses, this will add pressure to the cost base of many businesses. This may cause businesses to absorb the costs by cutting their planned investments, or they may look to cut costs in other places to save the money lost to the higher taxes. This could be through limiting pay rises, implementing recruitment freezes or setting higher costs for customers.  

These increases are likely to weigh more heavily on sectors such as hospitality, manufacturing, and retail, where cost bases are already substantial. These are sectors that often benefit from the more flexible, quicker turnaround nature of finance such as asset-based lending, making it an important tool for businesses navigating these issues.? 

The rise in Capital Gains Tax (CGT) announced at the Autumn Budget could also have a long-term knock-on effect on private equity activity in the UK. Higher CGT rates could cause the UK to be viewed as less attractive to investors, which could lead to a downturn in exits and new transactions coming to market.?However, the UK still has the lowest CGT rate of any European G7 country, so the impacts of the increase in CGT could still be relatively minimal. 

What activity to expect in 2025 

One area of the economy that has been somewhat quiet in recent years is private equity. Given stubborn valuation gaps and economic uncertainty, many private equity houses have held on to assets for longer periods than normal, with recent estimates suggesting assets are now held for upwards of six years⁴. Instead, private equity-backed businesses have focused more on buy-and-build strategies to strengthen their position in the market as they gear up for a sale.  

These firms are now coming under increasing pressure to begin exiting businesses and investing their funds into new businesses. Because of this, we’re expecting to see an uptick in private equity activity in 2025. This, coupled with expectations that economic growth will begin to stabilise in 2025, with the OBR estimating the UK economy will grow by 2.0% in 2025⁵ should help to create the conditions for a more buoyant deals market over the coming year.  

While it is unclear how quickly we will see this happen as this will depend on broader economic conditions, there is certainly an increased appetite for dealmaking in the UK’s mid-market. At Secure Trust Bank Commercial Finance, we are already seeing a surge of ambitious businesses coming to market. These firms are looking to capitalise on more favourable conditions, such as interest rates steadily decreasing and a more stable political landscape.  

To truly grow, these firms need the right support to navigate these complex deals. Because of this, lenders are increasingly having to work flexibly to get these complex deals done. This is where collaboration between funders and investors, like combining asset-based lending, debt and private equity, is vital to the UK’s mid-market business environment. As businesses navigate the complexities of today’s marketplace, the convergence of these create powerful partnerships that leverage expertise and insights from different sectors. This is something we are increasingly seeing and something that will follow us into 2025 as activity intensifies.

About the Author

James Hodkinson is Managing Director at Secure Trust Bank Commercial Finance, a leading asset-based lending provider. James has worked in banking and commercial finance for over 25 years, previously as director at the trade and working capital division of a major national bank where he was responsible for delivery of the service proposition.