As private equity (PE) enters 2025, much of the industry is bullish on what changing macroeconomic conditions will bring for M&A. Interest rate cuts, projected gross domestic product (GDP) growth, and political changes, such as potentially softened regulations by the Federal Trade Commission (FTC) and lower capital gains tax rates, are setting the stage for increased deal activity and fund raising.
But alongside these developments, challenges like higher cost of capital and lingering valuation gaps remain. At the same time, proposed tariffs could lead fund managers to focus on marketing portfolio companies that rely primarily on domestic suppliers, as supply chain dynamics with foreign suppliers remain uncertain. To stay competitive, PE firms are adopting creative approaches to deals and value creation, seeking new ways to generate returns in an increasingly complex market.
Read on for a look at the five PE trends we expect to see over the next 12 months.
There is cautious optimism that the gap between buyer and seller expectations will narrow, driving more deals to completion in 2025. Several macroeconomic factors are driving valuations to increase, including declining interest rates and a 2025 GDP growth forecast as high as 2.5%.
A change in administration could also create more fluidity in the exit markets as fund managers look to exit investments after extended holding periods. Immediately following the election results, upbeat earnings calls and an increase in both private equity and investment bank stock prices signaled expectations for increasing IPOs and M&A activity. These sentiments are bolstered by expectations for reduced regulatory oversight over M&A transactions and potential capital gains tax cuts, which could motivate owners to sell businesses after elevated inflation and increased borrowing costs.
To learn more about considerations for a successful exit, read our insight, Considerations for a Successful Private Equity Exit.
Though private equity is optimistic about 2025 macroeconomics, the shifting dynamics aren’t reflected in portco valuations quite yet. While they wait to feel the ripple effects of rate cuts and the impacts of a new administration, funds are prioritizing the sale of assets with the strongest potential for return on investment and holding onto assets with lingering valuation issues—aiming to grow portcos before moving to sell. This dynamic is delaying broader recovery in exit strategies but should begin to soften in 2025.
In 2025, fund managers will increasingly leverage add-on transactions, which currently account for three in four buyouts in the U.S. private equity deal market and drive 53.5% of all deal value in the middle market today. Though unlikely to increase their share of the overall deal market, add-ons will continue to make up a significant portion of PE deal activity in the next year. These transactions will be especially attractive for portfolio companies that haven’t been able to close the valuation gap under current conditions.
To learn more about add-on acquisitions, read our insight, Add-On Acquisitions: Domestic and International Insights.
Excluding public listings, exits to corporates make up 43.9% of YTD middle market exit value, as of the end of Q3, and we expect they will remain competitive in 2025. While interest rate cuts will be a tailwind for the whole market, a continued high interest rate environment will be more challenging for PE sponsors. A higher cost of capital slows funds seeking to finance deals and pursue investment opportunities that would have relied more on multiple expansions to drive returns.
We predict that corporate acquirers will maintain greater buyer strength during the upcoming M&A recovery. Corporations, primarily through carve-outs and right-sizing, have also been active sellers, presenting opportunities for PE in 2025. In Q3 2024, quarterly sponsor-to-sponsor exit count remains 17.4% below pre-pandemic levels. Looking ahead, we expect this dynamic to continue in 2025 while PE firms wait to feel the benefits of lower interest rates.
While the cost of capital remains elevated, PE funds are seeking creative strategies to drive portfolio company valuations. Simpler buyouts remain challenging in the current environment, but larger firms that are capable of handling intricate deals — such as carve-outs, take-privates, and international transactions — are finding value in these transactions.
In 2025, firms will continue to explore refinancing options to enhance portfolio value alongside further rate cuts. For example, PE firms will work to increase earnings before interest, taxes, depreciation, and amortization (EBITDA) through operational improvements and implementation of emerging technologies, such as artificial intelligence (AI). This method allows PE firms to address core processes rather than high-level strategic changes and are turning to add-ons and multiple arbitrages to grow portcos.
At the same time, PE firms continue to explore pathways to return capital to investors with total secondary transaction volume on pace for a 25% annual increase by the end of 2024. We expect PE firms will continue to leverage secondary transactions like continuation funds, along with Net Asset Value loans (which finance capital distributions by taking loans tied to fund assets), and dividend recapitalization deals.
International deal activity is increasingly tracking with pre-pandemic levels, as seen with global M&A activity growing by 27.6% in deal value and 13.3% by count YoY in the first three quarters of 2024. We expect this trend to continue in 2025 thanks to improvements in private and public debt markets and associated pricing. Additional optimism stems from activity of over 20 European PE deals valued over €1 billion in H1 2024, which also occurred in H1 2019. An acceleration of deals valued at €1 billion has been a precursor to M&A recovery in prior M&A cycles.
North American PE firms are increasingly finding success in international markets, particularly in emerging tech centers outside of the U.S. If the U.S. dollar continues to strengthen over the next year, we expect PE investors to continue to seek investments abroad in markets like Europe.
What Comes Next?
2025 brings both challenges and opportunities for PE. As the cost of capital remains elevated and geopolitical shifts impact markets, staying ahead will require agility, innovation, and a keen eye for emerging trends.
Are you prepared to navigate the complexities of 2025? Learn how BDO can help fund managers capitalize on M&A opportunities.