With deal financing conditions improving and equity proportions of deals starting to edge down,²⁶ co-investment capital may well flow to larger deals. This is especially likely given that many firms (beyond the mega-players) are not anticipating large size step-ups for their next fund.

The GSAM survey found that 30% of firms expect to raise the same or less in their next flagship fundraise than predecessor offerings; only 13% will look to raise a substantially larger fund.²⁷

Read our expanded report: PE investors want more co-investments. What’s fuelling their appetite?

Private equity valuations may rise to reflect more benign economic conditions

Private equity valuations have been hotly debated over the past two years as the correction in LPs’ public markets value was not matched by a decline in their private markets portfolio values — with the exception of venture capital.²⁸

Yet much of the discussion fails to consider the lag in private markets valuation shifts — which is true when markets rise as well as fall. We’ve seen a notable rise in public company valuations over the past year, yet unrealised private markets portfolio valuations have not increased in line with this.

As the chart below from Neuberger Berman demonstrates, in the year to mid-November 2024, the S&P 500 index was up 22.1%, the NASDAQ by 21.8% and MSCI World by 19.3%, yet buyout fund valuations rose by only 5% and venture capital declined by 1.6%.²⁹

Yet if public markets continue their upward trajectory and inflation remains under control, it seems likely that private markets funds will mark up assets in their portfolios in 2025 to reflect more benign economic conditions and a smoother growth path for portfolio companies. Our team is already seeing this happen in high-growth areas such as AI-related businesses, cybersecurity and green energy.

We are also seeing higher entry multiples in the US, where EV/EBITDA multiples stretched to 15x for new deals in the first three quarters of 2024 (they had dipped to 12x in 2023), according to Pitchbook. One reason for this is that buyout firms have been concentrating on selling some of their best quality assets which typically command higher valuations.³⁰

However, the rise in entry multiples has not (so far) been evenly spread. The EV/EBITDA multiples for deals in North America and Europe combined have increased less sharply — from 11.2x in 2023 to 12.7x for the first three months of 2024,³¹ which suggests that European valuations remain low relative to those in the US.

Private credit opportunities will likely move towards more bespoke financing

There has been talk recently of a “golden age” for private credit as high interest rates bolstered private credit’s returns (given its largely floating rate structures) while bank retrenchment reduced competition and swung terms in lenders’ favour. 

So could falling interest rates and a more competitive leveraged finance market remove some of private debt’s lustre? On paper, perhaps. Yet in reality, the asset class’s flexibility should continue to serve it well. 

Interest rates will likely remain higher than many businesses had become accustomed to before the pandemic, and lower interest rate debt will mature over the coming years. Borrowers will therefore need to be creative about how they access finance and manage their balance sheets. This should open up opportunities for private credit funds, which are well suited to providing tailored funding that meets a company’s specific needs.

Investors seem to agree. At $207 billion, private debt fundraising was up in the first three quarters of 2024, compared to $193.6 billion in the same period last year, Private Debt Investor figures show, with over a third of funds exceeding their targets.³² 

Secondaries are set to continue rising as tools for managing liquidity and portfolios

On track for a record-breaking 2024, secondary players have had a busy year. Deal volume surpassed $70 billion in the first half of 2024, according to Evercore data, setting the market on course for over $140 billion by year-end.³³

Secondary capital has been in high demand through the year as LPs and GPs have sought liquidity in an exit-constrained environment. For LPs, the motivation has been to unlock capital to fund existing commitments and make new fund investments.

GPs, meanwhile, have been under pressure to offer liquidity to their LPs and have tapped the secondaries market as a way of achieving this without having to sell prized assets in a flat M&A market. As a result, both LP-led and GP-led secondary deals have been more active than ever.

Secondaries fundraising has also been brisk in 2024, with totals set to match the all-time high of 2023, according to Secondaries Investor.³⁴ By the end of Q3 2024, secondaries funds had attracted $76.6 billion, just ahead of the $76.3 billion raised in the same period the year before. 

With around $253 billion of capital at their disposal, secondaries funds will have sufficient dry powder to deploy in the opportunities that 2025 will present.³⁵

And there should be plenty of these. Should 2025 see a gradual recovery of exits and a rise in distributions, sellers using secondaries as a tactical tool will replace those motivated by today’s liquidity crunch. 

A swathe of sellers new to the market — the proportion of LPs using the secondary market for the first time rose to 45% in H1 2024, up from 39% in 2023³⁶ — are now more comfortable with secondaries and may well return to fine-tune exposures and clean up portfolios.

The same is true on the GP-led side, where secondary deals are now an accepted exit route and a mainstream way of managing portfolios. GPs no longer need to sell their best assets to a competitor, for example, but can continue to create value. The growing number of dedicated GP-led funds raised by both primary GPs and established secondaries players supports this trend.

Growth will also come from the expansion of the primary market as record fundraising over the past decade translates into a growing pool of assets, some of which will turn over in the secondaries market.

Venture capital will continue prioritising profitability

After a choppy couple of years, venture capital is showing some signs of stabilising. The steep declines in valuations seen in 2022 are now starting to reverse, with global pre-money valuations all above 2019 thresholds in Q2 2024, Schroders analysis suggests.³⁷

Meanwhile, the first quarter of 2024 also saw venture capital performance move into positive territory after going negative in early 2022.³⁸ 

These positive signals put venture capital on a sounder footing for 2025, although gains have been hard-won. To get to this point, venture capital firms and founders have had to focus relentlessly on capital efficiency and profitability, with the “growth at all costs” mentality parked firmly in the past. A path to sustainable growth, favourable cash flow dynamics and a greater line of sight to profitability are the attributes venture capital firms seek out in today’s market. 

This cautious and highly selective stance has subdued overall deal values and volumes they may not pick up meaningfully for a little while yet. In the US, deal values and volumes were broadly flat to Q3 2024 versus 2023,³⁹ while in Europe, they were on track to decline in 2024.⁴⁰ Exits have so far disappointed, although with rising valuations, we may see some movement later in 2025.

An exception is the rise of venture debt across both regions, where this lower cost form of financing (relative to equity) is attracting higher growth companies. It is also finding favour with venture-growth players seeking additional finance for portfolio companies without the risk of having to mark down their valuations in an equity fundraising round. In the US, 75% of venture debt went to venture growth companies in 2024,⁴¹ while in Europe, the proportion is even higher.⁴²

Technology will power industrials and business services deals

No-one is going to get fired for predicting that AI-related investment will be a mega-theme for 2025. For private equity firms seeking out stable businesses with predictable revenue streams and high cash generation, the prize lies in targeting areas where this game-changing technology can be applied to greatest effect.

As a result, industrials and business services are likely to be among the stand-out sectors for deal activity over the coming year.

While the first half of 2024 proved quiet on a global M&A front for the sector, PwC analysts were predicting a pick-up in the second half of the year and beyond as inflationary pressures receded and the transformational potential of new technologies became apparent.⁴³

Business services has long been a key private equity target and the need for investment in further digitalisation is adding to its attractiveness. Automation in legal, professional and marketing services are areas where private equity sees value creation potential. Consolidating what are often fragmented sub-sectors is also a big theme.

In industrials, the imperative to acquire capabilities in AI, predictive robotics and smart manufacturing is also fueling increased private equity interest. Investment in industrial automation companies, specifically, soared in the third quarter of 2024, to $11.4 billion versus just $780 million in the same period of 2023, according to S&P.⁴⁴ This was boosted by KKR’s take-private of Japanese industrial automation business Fuji Soft, the first stage of which completed in November.⁴⁵

Macro risks will stay in the spotlight

Private equity’s agility can insulate the asset class from macroeconomic challenges, but it cannot bring immunity. With geopolitical tensions and conflict showing little sign of abating, private equity firms will need to continue navigating macro risks carefully. Indeed, 60% of GPs and LPs surveyed in a 2024 GSAM report said geopolitical risk was the biggest investment risk today — by far the top issue and higher than the 46% saying this in 2023.⁴⁶

With expectations that interest rates will not fall dramatically from where they are today, firms will also need to hone their value creation capabilities. GP responses in the GSAM survey demonstrate a clear focus on revenue growth to create value, both organically and via M&A.⁴⁷

While the prospect of recession in the US and in Europe appears to have faded for now,⁴⁸ ⁴⁹ there could be ripple effects from a second Trump presidency, potentially dragging on GDP growth next year and beyond if policies such as tariffs are enacted.

A narrowing IPO window is another risk that large GPs in particular will need to manage since there are limited alternative exit routes for their biggest deals. However, US IPO activity was up in Q3 2024, with proceeds in the first three quarters of the year higher than full-year 2023 totals, according to EY.⁵⁰ Absent any major shocks, lower interest rates could help sustain investor appetite for new issues for some time to come.

Read our expanded report: Five global themes that will shape 2025.

Operational focus will remain the key to success

As we noted above, value creation will take centre stage for private equity investors. That’s true of new investments being made today and it’s also true of existing portfolio companies — given that 81% of PE executives in an EY survey said that holding periods have been extended by up to three years longer than the historical average.⁵¹

The same survey identified operational value-add as the driver of 52% of private equity deals expected to be exited in 2024-2025, versus just 31% of deals exited in 2021. Multiple expansion and leverage have receded significantly over the same period.⁵²

To combat higher interest rates and a lack of multiple expansion potential, GPs are doubling down on operational improvements, cost-cutting and technological enhancements to drive value. 

Among the most effective actions in a higher interest rate environment are likely to be margin expansion in addition to revenue growth, by improving pricing strategy, sales force effectiveness, operational efficiency and product innovation. Bain & Company's analysis shows that around 15% of the returns generated from top-quartile deals stem from margin expansion.⁵³

This trend is seeing private equity houses bolster or re-organise their value creation capability, often by hiring operators with specific experience in areas such as supply chain management or technology integration and people with sector expertise, particularly in healthcare, technology and manufacturing.⁵⁴ ⁵⁵

What does this mean for investors?

Private markets appear to be moving on from the particularly challenging 2022-2023 period, with the coming year set for a continued recovery in activity levels. Over the next 12 months, investors should be prepared for:

• Higher distributions. As M&A and IPO markets react to falling interest rates and exits start to come through, we’d expect distributions to paid -in capital to rise — both in absolute and relative terms. Yet the increase is likely to be gradual and will be contingent on there being no negative macroeconomic shocks.
• Strong secondaries performance. Even with more exit activity, private equity secondaries will continue to be an important source of liquidity for private markets, given the high level of inventory still stuck in portfolios. This, combined with more tactical secondary sales, will keep deal flow high, enabling buyers to be highly selective in the transactions they complete.
• A potential rise in valuations. Even as public markets valuations have increased over the past year, private equity firms have remained conservative when valuing their portfolio companies during 2024. However, should economic conditions continue to improve, GPs may well start to mark up the valuations in their portfolios.

These three points highlight the resilience of a diversified private markets exposure that includes secondaries and private debt as well as private equity, infrastructure and venture capital — the various characteristics of each segment can offer investors benefits at differing points of the cycle. 

And while external shocks may affect private markets’ activity levels, the long-term nature of the asset class and its hands-on investment style protects and builds value in portfolios in good times and bad to generate the returns investors expect.