Consensus Emerging That 2025 Will Be a Better Year for Private Equity Dealmaking

After a steady, but not spectacular, year for private equity dealmaking in 2024, there appears to be some consensus emerging that 2025 will be a much better year from a PE dealmaking perspective.

What would be the catalyst for that you might ask?  First, there is the hope of more certainty as there were a record number of parliamentary elections across the globe this year, so with new governments bedding down their policies, there is at least some visibility (leaving aside France perhaps) on the legal and regulatory approach for the next 4 to 5 years. There is also an expectation that with Donald Trump in the White House, he will be good for business generally and will boost the American economy and stimulate more investment. In addition, there has been a general downward trend (albeit more slowly than many would have hoped) in interest rates, resulting in a lower cost of leverage and increasing debt availability. With increased certainty comes increased investor confidence, and willingness to invest, which is helped by the amount of dry powder that funds have at their disposal. 

A further potential plus is that the word “peace” is at least being used a lot more frequently in the media in connection with the Ukraine war and Middle East conflict, which also gives cause for optimism, as there will be a need to rebuild infrastructure and industry in the affected regions, and this may remove any dampening effect that currently exists on investment in countries closest to these hostilities.

If there is still one major sticking point, this centres mostly on the price gap between what a seller wants to receive and the buyer is willing to pay for an asset. As a result, we are all seeing the continued rise of continuation funds, with assets/portfolios being sold onto new continuation funds managed by the same manager, alongside a new third party co-investor, with pricing usually around the best bid being offered as part of any prior “failed” auction process. With increased frequency, and familiarity, this continuation vehicle “exit” route is becoming more mainstream for investors.

For those looking to list any of their portfolio companies, where that is considered a viable exit route option as opposed to a private sale, the US capital markets appear to have benefited most, and that is likely to continue despite the best efforts of for example the London Stock Exchange to make the UK listing rules less onerous. Given funds look to maximise the price received for the assets they hold and to achieve the best returns for their investors, the higher pricing and deeper liquidity of the US markets cannot be ignored, despite the higher costs and burden of regulatory compliance.

A theme that is likely to continue into 2025, is that auction sales generally will continue to take longer to get to signing/closing when compared to the heady dealmaking days of 2022 and first half of 2023, with many auction participants unwilling to spend a lot of money until they have exclusivity or some form of cost cover.   

Looking at sectors where PE funds are investing, there continues to be a lot of investment into tech businesses generally, particularly anything AI related or cybersecurity related, and where pricing is at a premium; continued investment in professional services firms and implementing buy and build strategies around these; selected healthcare assets, particularly around healthtech, CDMOs, pharma services and related; education and training; B2B businesses; industrial businesses with manufacturing capability; and investments in energy transition and renewable plays. Real estate, infrastructure and construction could be big winners next year (at least in the UK with planning law restrictions proposed to be softened/removed), along with facilities management and supply chain management related businesses. With a lot of consumer businesses in the sales pipeline next year, it’s also going to be interesting to see how many get sold and the pricing that these businesses command. 

On fundraising, there has in recent years been a flight to quality and the larger funds, which has hampered fundraising particularly in the mid-market, with capacity having been sucked out of the market by these larger funds, coupled with a lack of liquidity from asset realisation by the mid-market funds. My expectation is that fundraising will continue to be tough for many mid-market players and new funds being raised by new fund managers. The secondary private equity market and GP-led market will continue to grow, along with the acquisition of stakes in the GPs themselves, particularly where the GP is being promised material cornerstone funding for the next fundraise by the GP stake acquirer. We are also seeing more big fund managers acquiring other fund managers, leading to more fund consolidation - again a trend we expect to see continue in 2025.   

Owing to a lack of liquidity in the market, and with a view to enhancing returns for the underlying funds, the fund finance market has been extremely busy in 2024 with GPs actively exploring and lenders actively competing to provide GPs with bridging facilities, NAV lines and co-investment debt facilities, and that trend should continue into 2025.

In summary, we expect a busier year ahead than 2024 and hopefully a vintage year for PE investment and financing in 2025.

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Tom Whelan is a Partner at Reed Smith in London

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The views expressed in this article are those of the author and do not necessarily reflect the views of AlphaWeek or its publisher, The Sortino Group