Private equity 2025 outlook: Soft landings into dry powder
Recent challenges for the private equity market may be overcome as declining rates and lower inflation set the stage for improving multiples.
Authors
While 2024 saw a notable slowdown in dealmaking, there are emerging signs of a recovery that suggest the private equity market could be more vibrant in 2025.
2024 presented multiple challenges
As in 2023, this year bore witness to wide bid-ask spreads and tighter liquidity. When rates rise, borrowing costs for acquisitions also rise, pushing EV/EBITDA1 down. Buyers pay more to borrow less, thereby lowering the amount they are willing and able to bid for assets.
In a similar way, higher rates have put downward pressure on cash flow multiples, while inflation increases costs for companies lacking adequate pass-through. Sellers, on the other hand, have been attempting to exit assets bought when leverage was cheap and multiples were increasing. These dynamics have created a mismatch between the price buyers are willing to bid and the price sellers are willing to accept.
Reasons for optimism in 2025
Even amid these challenges, several developments suggest more favorable conditions may be in store for the new year.
- Deal values are on the rise. While large buyout EV/EBITDA multiples have decreased, the overall deal values are increasing, a trend driven by a preference for larger investments in established companies.
- Exit values in the global market have stabilized, and there has been a recent uptick in sponsor-to-sponsor exits. However, a notable valuation gap persists, with small to mid-sized buyouts trading at a significant discount compared with their larger counterparts, a trend that suggests a difference in perceived value in the market.
We believe that many of the factors exerting downward pressure on multiples will ease, and falling interest rates and lower inflation should set the stage for improving multiples.
We also think investors could be well-served if they “follow the money” and consider GP-led secondaries. Nearly half of the record-level secondary deal volume in the first half of the year was in these vehicles, also known as continuation funds. They align the financial incentives of the General and Limited Partners and thereby create potential benefits for all stakeholders -- the original sponsor, new and existing investors, and the company or companies in the new fund structure.
Favorable conditions for the small-mid market
We think conditions will also favor a focus on the small and middle markets. These markets are diversifying, recent history showed their potential ability to perform well during periods of volatility, and the law of large numbers makes it inherently easier to generate more meaningful multiples on smaller companies.
Operating in the small and middle markets also decreases reliance on the still stagnant IPO (initial public offerings) market for exits. Further, after successful efforts to help a small or mid-sized company grow into a large cap, exits can be made larger part of the market, where a considerable pile of dry powder remains.
To learn more, read the full paper, Soft landings into dry powder.
We share additional views on the opportunities in private equity in The attractions of the small-mid private equity segment and Private equity’s resilience during major crises: A 25-year analysis.
References:
1 The EV/EBITDA multiple is a financial ratio that compares a company's Enterprise Value to its earnings before interest, taxes, depreciation and amortization.
Subscreva o nosso conteúdo
Visite o nosso centro de preferências e escolha que informação deseja receber por parte da Schroders.
Authors
Topics