Key Takeaways
- Deal activity to rise in 2025 as valuation gaps narrow, driven by interest rate cuts and GDP growth.
- Add-on deals will boost portfolio valuations, making up a sizable part of PE activity.
- International markets offer new opportunities for North American PE firms amid domestic uncertainties.
—
As private equity (PE) enters 2025, overall, the industry feels optimistic about the changing macroeconomic conditions and the impact they’ll have on M&A. With interest rate cuts, projected GDP growth, and potential regulatory changes, such as softened FTC regulations and lower capital gains tax rates, the stage has been set for increased deal activity and fundraising.
However, challenges remain, with things like higher capital costs and lingering valuation gaps creating potential issues. Proposed tariffs may lead fund managers to focus on marketing portfolio companies that rely on domestic suppliers, given the uncertainties in supply chain dynamics with foreign suppliers. To stay competitive, PE firms are adopting creative approaches to deals and value creation, seeking new ways to generate returns in market that will continuously grow in complexity.
1. Deal Activity Will Continue to Accelerate
There is cautious optimism that the gap between buyer and seller expectations will narrow, driving more deals to reach the finish line in 2025. Several macroeconomic factors are driving valuations to increase, including declining interest rates and a 2025 GDP growth forecast as high as 2.5%. A change in administration could also create more fluidity in the exit markets as fund managers look to exit investments after extended holding periods. Upbeat earnings calls and rising stock prices for private equity and investment banks signal expectations for increasing IPOs and M&A activity. Reduced regulatory oversight and potential capital gains tax cuts could motivate owners to sell businesses after elevated inflation and increased borrowing costs.
2. Funds Will Bolster Portco Valuations with Add-on Deals
While private equity is optimistic about 2025 macroeconomics, you won’t see the shifting dynamics reflected in portco valuations just yet. Funds are prioritizing the sale of assets with the strongest potential for return on investment and holding onto assets with lingering valuation issues, aiming to grow portcos before moving to sell. This dynamic is delaying broader recovery in exit strategies but should begin to soften throughout 2025. You can expect add-on transactions, which currently account for three in four buyouts in the U.S. private equity deal market, to continue to make up a massive part of PE deal activity in the next year.
3. Corporations Will Continue to Actively Buy Assets From – and sell to – PE Firms
Excluding public listings, exits to corporates make up 43.9% of YTD middle market exit value, as of the end of Q3, and we expect they will remain competitive in 2025. While interest rate cuts will be a tailwind for the whole market, a continued high-interest rate environment will be more challenging for PE sponsors. A higher cost of capital slows funds looking to finance deals and pursuing investment opportunities that would have relied more on multiple expansions to drive returns. Corporate acquirers will keep greater buyer strength during the upcoming M&A recovery, presenting opportunities for PE in 2025.
4. Creativity — in Deals, Distributions and Value Creation — as a Competitive Edge
While the cost of capital stays elevated, PE funds are seeking a walk on the creative side — with their strategies, that is — to drive portfolio company valuations. Simpler buyouts stay challenging in the current environment, but larger firms capable of handling intricate deals — such as carve-outs, take-privates, and international transactions — are finding value in these transactions. In 2025, firms will continue to explore refinancing options to enhance portfolio value alongside further rate cuts. PE firms will work to increase EBITDA through operational improvements and emerging technologies, such as AI. Additionally, secondary transactions like continuation funds, NAV loans, and dividend recapitalization deals will be used to return capital to investors.
5. North American Firms Will Seek Returns Abroad Amid Continued Uncertainty
International deal activity is increasingly tracking with pre-pandemic levels, and global M&A activity grew significantly in 2024. This trend is expected to continue into 2025, driven by improvements in debt markets and associated pricing. North American PE firms are finding success in international markets, particularly in emerging tech centers outside the U.S. If the U.S. dollar continues to strengthen, PE investors will likely seek investments abroad in markets like Europe.
What Comes Next?
2025 brings both challenges and opportunities for PE. As the cost of capital is still elevated and geopolitical shifts impact markets, staying ahead will require agility, innovation, and a keen eye for emerging trends.
How MGO Can Help
At MGO, we understand the complexities and opportunities that 2025 brings for private equity. Our team provides strategic insights and innovative solutions to help you navigate the evolving market landscape. Whether it’s optimizing deal structures, enhancing portfolio valuations, or exploring international opportunities, we are here to support your goals with tailored, data-driven approaches. Let us help you to achieve sustainable growth and success in the year ahead. For more information, visit our Financial Services page.