Next in private equity 2025
Leading PE firms are reimagining their business processes and seeking diversified investment opportunities to drive change throughout their organization.
As markets improve and activity increases, value creation remains front and center
Private equity (PE) deal activity remained suppressed in 2024 as investors continued to wait for potential rate cuts, improved macroeconomic conditions and policy changes post the November election. Market uncertainty and premium multiples paid by private equity buyers over the last few years also made it difficult for buyers and sellers to agree on asset valuations.
When deals closed, we saw a focus on complex, carve-out and bilateral agreements, as investors sought value beyond traditional leveraged buy outs, where bid-ask spreads remained high.
Post election, markets saw improved investor sentiment around a potential return to enhanced deal activity in 2025. However, PE portfolio company performance remained muted, further highlighting the need for value creation beyond traditional investment strategies around leverage and multiple arbitrages.
Themes to watch out for:
- Continued attention on value creation to drive differentiated returns
- Commercial strategy coming into focus as inflation expectations subside and pricing strategy becomes a key driver of topline growth
- Incorporating AI in business operations to drive efficiency (e.g., call center operations, software development) and build competitive advantage
- Continued carve-out activity in this deal market as a value-enhancing opportunity
Note: The primary M&A data source used in the 2025 outlook is S&P Capital IQ.
Strategic thinking
After a prolonged wait-and-see period linked to higher interest rates and market uncertainty, we expect a stronger economic outlook and dealmaking environment in 2025 thanks to increased investor confidence, the Federal Reserve’s interest rate reductions and high levels of dry powder.
Against this backdrop, we anticipate a significant increase in PE deal flow. We expect carve-outs and take private deals to remain prevalent. Software may continue to be a key sector of focus for PE as predictable recurring revenue and cash flows appeal to buyers. Increased consumer spending expectations due to a strong economic outlook and rising real incomes could also support deal activity in the retail and consumer segment.
Leading funds will need to continue developing best-in-class operational capabilities to drive revenue growth and margin uplift in their portfolio companies.
“A bullish dealmaking and macroeconomic environment over the next year will likely demand companies devote resources to demonstrating competitive returns through value creation.”
The bottom line
Public market earnings are expected to increase in 2025 leading to heightened pressure for private markets to demonstrate competitive returns. Value creation and commercial excellence will be critical to unlocking growth.
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