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Next in private equity: Trends shaping 2025 and beyond
Where private equity can find success in 2025
This past year found private equity (PE) firms, yet again, struggling to find exits and holding record dry powder. Limited partners (LPs) have taken notice and are becoming more vocal about the sector’s difficulties with 28% noting that investment performance has fallen below their expectations.1 Executives hold similar concerns with 70% of them telling us in our October 2024 PwC Pulse survey that an uncertain macroeconomic environment presents either a moderate or serious risk to their business.
As these pressures continue to converge, many leading PE firms are meeting the demand by reimagining their traditional business processes and seeking diversified investment opportunities to help drive change throughout their organization.
Pivotal trends in 2025 fall into these categories:
PE firms are adding multiple asset classes, increasing complexity in the process
Many PE firms have started to make drastic changes in their legacy business practices in an attempt to pursue new investment opportunities and to remain competitive for LP commitments. In an effort to have a broader investor base and grow assets under management, for example, some funds have turned to building out funds for retail investors. Others have added to their product mix by targeting portfolio companies (portcos) outside of the funds’ typical industries, opening private credit funds, building secondary funds and/or adding infrastructure investments or other nontraditional PE asset classes.
Some firms started these moves earlier, but for many this is introducing new layers of operational complexity and forcing a functional maturity that they haven’t experienced before. Historically, PE funds operate with very lean teams and the majority of back-office work is done in mostly manual systems. As a result, firms now find themselves increasingly needing investments in FP&A, investor relations, payroll, reporting and HR capabilities. Given this growing complexity, many must now think about a host of other issues, including reexamining their tax operating model and if their organization is fit-for-purpose. Further, by moving into spaces that have more public financial market or economic impact (like private credit), regulators could start asking questions that firms may be unprepared to answer.
Many PE firms find themselves in a place where they’re trying not to add additional costs beyond what management fees can support, while adding these new assets. There’s no silver bullet combination of asset types, investor products and back-office support that can make this an easy transition. Leaders are realizing it’s time for their firms to embrace a level of back-office sophistication that other investment companies have had for many years.
Firms look beyond the traditional playbook to build robust value creation plans
To get the top deal available, many PE firms have been paying a higher premium than the public market, relative to revenue growth trends (see chart).2 Making deals at a premium has put PE firms in a position where exiting at a valuation that can drive an acceptable return has been a challenge.
We’ve seen many PE firms find their desired deal returns by moving beyond traditional financial engineering and cost containment to true investment back into the underlying portco’s business model. Operating partners are improving their portco’s talent structure, pricing models, commercial excellence, Gen AI programs, tax strategy and/or some combination of the above. True value creation comes from those places where multiple levers can work in unison. Imagine a change in pricing is made in conjunction with operations to allow cost containment programs to have no topline impact. Regardless of where a firm chooses to focus, portcos can make the returns LPs expect by applying the future of value creation.
Tax remains vital to not just value creation strategy but PE fund structures
Whether you’re considering opening your PE funds to retail investors, getting into sports investing or building out a value creation plan for your portfolio companies, tax planning and strategy can have a significant role to play. Over the past year, we’ve seen many leading firms finding opportunities at portcos by implementing cash tax planning strategies to help manage limitations around interest deductibility, bonus depreciation, research and experimental expense deductions. Looking ahead to 2025, tax leaders should think about the impact potential tariffs on imports, increased scrutiny on supply chain choices and a possible extension of the TCJA could have on their portcos.
PE firms should also stay abreast of regulatory changes. While the referees may change under a new administration, legislative changes may be very slow to occur. In addition, states have been adopting pass-through tax changes that PE firms have found useful. You can expect that among the new administration’s initial tasks will be to make major changes in the tax code. Still, that may not be of much benefit to portcos that are behind on Pillar Two changes. Whatever comes next, tax remains a centerpiece to all planning, portco improvements and fundraising.
PE firms and their portcos use sustainability as a differentiator
PE firms and their portcos made several sustainability promises over the past few years, and most have not adjusted those goals. Still, we’re finding that several industries are missing their decarbonization targets. LPs haven’t forgotten the sustainability promises PE firms made both at the fund and portco levels. Meeting reporting standards, which has its own difficulties, in particular when it comes to CSRD, will likely not be enough for the market.
How are leading companies managing to fulfil their obligations? They use sustainability as a value creation opportunity, to help find market opportunities and to gain both revenue and cost advantage over their competitors. They build a strategy that balances ambitious targets to help mitigate climate risks while balancing cost and time to deploy. Simultaneously, they are staying ahead of changes in global, EU and California reporting requirements. It’s a tough balance, but successful companies are turning it into a differentiator, standing out among their peers while simultaneously building out a long-term operating advantage.
As sustainability is not a simple compliance obligation but rather a driver for value creation, investors are scrutinizing the PE firm diligence process and transformation objectives. For example, ESG diligence work is not just focusing on the current maturity of the business but also looking forward to what will help drive value creation during the holding period. Increasingly, we’re finding that a renewed focus on sustainability attributes and differentiation can justify a higher exit premium.
1. Source: PwC analysis based on data from Preqin
2. The comparison here of public and private multiples may also be affected by liquidity, sector composition and size, but the overall trend of multiple premium still demonstrates consistent higher valuations paid by PE firms for portcos.
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