Private Markets

Favorable Conditions Boost Private Equity Optimism 

As we look ahead to 2025, we anticipate a broad resurgence in new deal and exit activity within the private equity industry. Several factors contribute to this optimistic outlook:

• Normalization Post-Pandemic: The Covid-19 pandemic created significant distortions in company performance, both positively and negatively. As we distance ourselves from this period, businesses are expected to operate in a more stable environment, reducing uncertainty and fostering increased deal activity.

• Favorable Credit Conditions: With robust credit markets and a downward trend in interest rates, the cost of capital for buyouts is decreasing, making acquisitions more financially viable.

• Backlog of Exits: We expect exit activity, which was subdued in 2022 and 2023 after reaching exceptional levels in 2020 and 2021, to continue to recover in 2025.1 Exit value is forecast by PitchBook to reach $396 billion in the US in 2024, exceeding pre-Covid levels.2 Lower exit activity has created a backlog of companies that general partners (GPs) are eager to sell, with US private equity managers holding an eight-year inventory at current exit pace.3 In our experience, a surge in liquidity has followed periods of muted exit activity historically.

• Political Stability and Regulatory Shifts: Market participants widely believe that there is likely to be a significant easing of the regulatory environment under President Trump. Smaller private companies, often more burdened by regulations than larger public entities, and fund managers should stand to gain significantly from changes in reporting and compliance requirements. Regulatory relief is also anticipated in anti-trust scrutiny, which should enhance prospects for M&A activity.

• Tax Environment: Market participants also expect tax rates to decline or remain flat under the new US administration, contrasting with the anticipated expiration of previous tax cuts in 2025. Lower tax rates typically increase after-tax cash flows, which can encourage businesses to invest in growth through hiring and capital expenditures. Additionally, business owners may be more inclined to sell their companies when tax rates are lower, while reduced individual tax rates could stimulate consumer spending and economic activity.

The anticipated increase in market activity is likely to stimulate fundraising efforts among private equity managers. If fund deployment accelerates with new deals, GPs will return to the market to raise additional capital, which should be supported by investors who received liquidity from older deals and need to redeploy capital by making new commitments.

In this environment, managers with deep sector knowledge and operational capabilities should be particularly well-positioned. Their expertise is more likely to allow them to identify promising sub-sectors and companies, determine appropriate valuations, and implement strategies to accelerate growth and drive transformational change. We think this skill set is crucial during times of heightened uncertainty.

However, it is important to acknowledge that the current investment landscape for buyouts differs from the past decade. Competition has intensified, and interest rates remain higher than in recent years, potentially staying elevated for an extended period. Consequently, buyout returns may not benefit from the same tailwinds from low interest rates as before. Instead, we expect returns to increasingly depend on private equity managers’ ability to generate alpha through fundamental revenue growth and EBITDA expansion at their portfolio companies.

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