The private equity industry has been oscillating tremendously since the pandemic started. However, according to the latest data, the PE deal count is expected not to decline further this year. The experts believe PE activity might stabilize in the year’s first half and increase in the last half.
Many factors have been buffeting the PE market, such as socio-economic conditions, inflation and interest rates, geopolitical events, etc. We hope these factors will alleviate the obstacles we face in 2023.
Let us know what to expect in the private equity industry in 2025.
Private Equity Trends to Watch For in 2025
2023 was not a great year for the private equity sector. Though there were some huge PE transactions and an encouraging pick-up in private equity deals and fundraising, it fell short in 2022. So, if you are thinking about what 2024 has in pipeline for private equity space, then here is our prediction:
A Mixed Bag
We expect the PE industry to have promising activities like good leveraged buyouts but few private equity exits. The beginning of the year might remain slow. Certain macro trends, such as geopolitical conflict, industry regulation, etc., will add to the impact in the coming year and make the private equity investment landscape challenging. But there are many encouraging trends expected, too. While 2023 saw a low PE quarter of the year with deceleration in the Initial public offerings creating low, 2024 is expected to increase the activity and pick up, though! Private equity exits may remain sluggish, but some key deals will happen.
Secondaries Markets
Less PE exits can create more space for private equity secondary markets. The industry might witness higher GP-led secondary markets during company exits. According to the Goldman Sachs Asset Management report, 48% of LPs might increase allocations over the next few years. When we expect such scenarios in 2024, we might see a surge in LP-led and GP-led secondary markets.
Leveraged Buyouts
Leveraged buyouts have always attracted the attention of PE investors and experts. Even in 2023, LBOs gained a lot of interest and will continue to do so in 2024. As per the Pitchbook data, leveraged buyout and mergers and acquisition recorded a seventeen-month high in Sep ’23. Due to the high rates, private equity investors are cautious of LBO activity. LBO is relying more on equity while deal structuring. LBO deals in 2023, like Worldpay, Fogo de Chão, etc., set an encouraging and thrilling path for the LBO activity.
Regulatory Compliance
The industry is facing new and increased regulations. U.S. Securities and Exchange Commission Chairman realizes the importance of private funds and their advisers’ role in capital market sectors. To augment transparency and integrity, the SEC wishes to promote greater competition and efficiency in big, small, institutional, retail, etc., investors. 2023 saw various regulations in the private equity industry. The new rulebook sets the tone for greater regulation of the industry. With tremendous private market growth in the U.S. over the last ten years, the SEC identified the need to control the private equity professionals and decided to lay a heavier regulatory hand.
Geopolitical Events
There is no denying the fact that geopolitical events can create a lasting impact on markets. In the past also, economic disruption and imbalance, the effect of geopolitics, have greatly impacted all industries, including private equity. However, the good news is that the impact has been short-lived. With Israel-Hamas in October 2023, the tension and uncertainty have left a short-term impact on the financial markets. Even due to the Russia-Ukraine war, private equity could see a significant impact, resulting in slow IPOs, deals, and exits.
Inflation and Interest Rates
Interest rates have become higher, and low inflation has made financial projections more certain. The market may move up with a higher confidence and deploy PE dry powder. With dry powder nearly $1tn globally, a major portion is focused on the large end of the U.S. market.
Valuation Expectation Gap
The PE market has seen a valuation gap between buyers and sellers because of uncertain essential market variables like inflation, input and output costs, revenue, etc. Due to the quiet deal flow, there was a gap at the start of 2023. However, the gap is now narrowing in 2024. Also, PE companies are employing different deal structures like earnouts, seller notes, etc., for closing transactions.
Wrapping Up
The US capital markets saw an interest rate drop in the first half of 2024. The economy is expected to grow by at least 1.5% during 2024 and 2025. Inflation and high-interest rates will remain moderate and increase transaction count. Overall, the PE industry has been weathering, but 2025 private equity trends will see improved transaction levels, and PE will become an important capital source.
