High interest rates in the United States, President Donald Trump’s on-again, off-again approach to tariff policy, and geopolitical uncertainties have eroded company valuations and contributed to firms holding onto portfolio firms far longer than expected.

The capital tie-up is playing a role in the slowdown in dealmaking. Mergers and acquisitions, a key barometer of global economic health, have stalled this year.

"Patience is wearing a little bit thin" among limited partners (LP), said Kevin Desai, PwC U.S. deal platform leader.

LP firms combine some of the largest and most influential investors in the world and invest trillions of dollars in PE firms in expectation of regular returns.

Despite entering 2025 with high hopes for an M&A rally under Trump, deal volume and value have remained largely flat year-over-year, with 4,535 deals totaling $567 billion through May, PwC said.

PwC’s May 2025 Pulse Survey found that 30% of respondents have paused or are revisiting deals due to tariff issues, fueling investor frustration over delayed returns.

"In a typical M&A cycle, $1 trillion would have already been put back into the market,” Josh Smigel, PwC’s U.S. private equity leader, told reporters while disclosing the firm's 2025 midyear outlook on deal activity.

Private equity firms, which deploy LP capital into businesses across industries, currently have $3 trillion invested in 30,000 companies, according to PwC, with 30% held for longer than five years.

That is above the traditional timeline by which funds expect to have a profit on their investments.

Earlier, these firms could easily hit their rate of return targets by using cheap debt and favorable market conditions.

A separate PwC study found 57% of executives, who poured capital into businesses that needed to be fixed, saw the investments shrink or stay the same.

So, now, PE firms need to be creative to squeeze profit from assets - often bought at peak prices, said Liz Crego, PwC's industry markets leader. That includes selling a small portion of a business that can be more valuable as a separate entity, she said.

A more uncertain market has also led to a decline in cross-border deals to 16.9% of total activity, down from 18.7% in 2021. China-related deals, in particular, face heightened scrutiny and strategic reevaluation, PwC said.

CAUTIOUSLY OPTIMISTIC

The initial public offering (IPO) market has shown signs of life, with 31 traditional IPOs raising $11 billion through May. While April saw a pause due to tariff shocks, activity resumed in May and June, with fintechs like Chime, valued at $18.4 billion at its Nasdaq debut, leading the charge.

Special purpose acquisition companies (SPACs) are also making a modest comeback, with over 50 of those publicly traded shell companies created to raise capital through IPOs.

To unlock the $1 trillion held by PEs, the recession cloud over the U.S. would have to recede, Washington would need to provide clarity over tariffs and interest rates must decline, Smigel said.

Nevertheless, PwC expects M&A activity to improve in the coming quarters, with pressure from the LP funds looking for returns and as assets are repriced.

"Whether that is the back half of 2025 and into 2026, there are reasons to be optimistic," Smigel said.