Industry Trends
The surge of secondaries: A new era in private equity
In recent years, the private equity secondary market has experienced significant growth, driven by the need for flexibility, liquidity, and innovative solutions. Initially a niche segment, secondary transactions are now essential for portfolio management, offering liquidity options and strategic advantages to Limited Partners (LPs) and General Partners (GPs). Key future trends include innovative deal structures, expansion into new asset classes like private credit and real estate, and technological advancements that enhance transparency and efficiency.
The secondary market allows LPs to sell pre-existing commitments, providing liquidity, while buyers can access mature assets with shorter holding periods. GP-led transactions have become prominent, enabling fund managers to create liquidity for LPs while retaining high-performing assets for further growth. The market has grown due to economic uncertainties, volatility, and the need for portfolio rebalancing. Specialized secondary funds and dedicated buyers like Blackstone and Ardian have further driven market growth.
Technological innovations have streamlined the market, making it easier for LPs and GPs to connect with buyers and conduct due diligence. However, the market faces risks like increased competition and rising asset prices, which may affect risk-adjusted returns. Despite these challenges, the secondary market is projected to grow, potentially reaching $500 billion in transaction volume in the coming years, with estimates suggesting it could hit $800 billion by 2028. This growth reflects the market's ability to provide liquidity and optimize portfolios, attracting more participants.
Source: Sadis
Market Sentiments
Private equity payouts decline by 50% in 2024
In 2024, private equity payouts fell 50% short, marking the third consecutive year of declining investor returns due to a deal drought. Typically, buyout houses sell 20% of their investments annually, but this year’s cash payouts are forecasted to be about half that figure. Cambridge Associates estimated a $400 billion shortfall in payments to investors over the past three years compared to historical averages, highlighting the pressure on firms to return cash to investors by exiting more investments. Rising interest rates since early 2022 have increased financing costs and decreased corporate valuations, making it difficult for firms to strike deals at attractive prices. However, merger and acquisition activity is expected to accelerate in 2025, potentially addressing a $3 trillion backlog of aging deals. Extensive public offerings in 2024 have boosted confidence in taking companies public, while Donald Trump's election has added to Wall Street's optimism. Despite this, Andrea Auerbach of Cambridge Associates cautioned that resolving the industry's issues could take years. Private equity firms have used continuation funds to return cash to investors, with Jefferies forecasting $58 billion in such deals for 2024, a record 14% of all private equity exits. However, some investors are skeptical about selling assets at current valuations, noting that many deals from 2021 are carried at overly optimistic valuations. Goldman Sachs reported that recent private equity asset sales have been made at discounts of 10-15% to funds' internal valuations. This indicates that private equity assets are still over-marked and contribute to the current situation where assets remain unsold.
Source: Financial Times
Sovereign wealth funds: Redefining private markets
Principal investors, such as sovereign wealth and public pension funds, are increasingly influential in the investment world, driven by evolving expectations, a changing interest rate environment, and the need to manage large asset bases for performance and impact. These investors are adopting more active investment models, including co-investments, deal leadership, and strategic partnerships, to gain greater control and align investments with long-term strategic objectives. The relationship between principal investors and GPs is evolving. GPs must offer customized investment structures, align incentives with investors' long-term goals, generate alpha, and demonstrate leadership on ESG topics.
BCG's Global Principal Investors Report 2024 examines these trends and their implications, focusing on the most extensive base of limited partners. The report discusses the expanding size and scope of the principal investor universe, overarching megatrends, and the changing dynamics between principal investors and GPs. It identifies key imperatives for principal investors and explores the implications for GPs and asset managers, highlighting factors determining which players capture a significant share of principal investor assets. The future success of principal investors and GPs will depend on their ability to collaborate effectively, with principal investors needing to build internal capabilities or deepen partnerships with GPs and external advisors.
Year End Review
2024 PE market dynamics and 2025 projections
In 2024, private equity transactions were influenced by several key factors. Deal activity increased, driven by budget predictions for tax increases following the UK Labour government's election and the steadying of inflation and interest rate cuts. EY reported a 36% increase in deal value and an 18% rise in volume by Q3 2024 compared to 2023, though still below 2021 and 2022 levels due to high borrowing costs affecting EV/EBITDA multiples.
Key themes included using continuation funds and secondaries to hedge against uncertainty, modest exit activity, and the importance of clear value-creation plans due to extended hold times. The technology and healthcare sectors attracted substantial investments, while energy and infrastructure (E&I) assets gained popularity for their stable returns and alignment with global net-zero targets. Bolt-on transactions remained a strategy for value creation, and there was a growing focus on ESG diligence.
In 2025, optimism is high, with expectations of increased deal volumes and exit values due to lower interest rates and political stability. LPs are bullish, with many planning to improve or maintain allocations to alternatives. Deal terms may see fewer earn-outs and deferred considerations, and investments in E&I, healthcare technology, and AI are expected to continue. However, PE funds must navigate new regulatory challenges, including stricter antitrust legislation in the US and UK.
Overall, the UK PE market showed resilience in 2024, and there is cautious optimism for a very active 2025 amidst falling interest rates.
Source: Shoosmiths
Market Opportunity and Challenges
PE exit market's revival: Emerging opportunities
At the start of 2024, private equity firms hoped for favorable market conditions to exit assets and realize gains. However, geopolitical uncertainties, high interest rates, and currency fluctuations stalled the investment cycle. By the end of 2023, the private equity sector held a record 28,000 companies valued at over US $3 trillion, with 18% held for over five years. Continuation funds accounted for 43% of US $72 billion in secondary deals in early 2024. As 2025 approaches, optimism rises, especially in the US, where a Federal Reserve rate cut and the new administration's policies are expected to spur M&A activity. The US IPO market is also trending upwards.
In Continental Europe, exit values rose 90% quarter-on-quarter in Q2 2024, driven by mega-exits and IPOs. Despite lower internal rates of return, the European PE market shows signs of recovery. Dividend recapitalizations and continuation funds remain common. In Japan, currency volatility has created mixed outcomes for PE firms, with a focus on operational engineering over leverage. The Tokyo Metro IPO raised hopes for a rebound in IPO activity.
Australia saw deliberate dealmaking strategies in 2024, with significant healthcare, technology, and infrastructure transactions. Blackstone's acquisition of AirTrunk sparked interest in data centers. Dealmaking is expected to increase once monetary policy eases.
In ASEAN, US megafunds are bullish on future activity, particularly in Japan, Indonesia, and Vietnam. The region's private credit sector is maturing, and Singapore remains the financial hub. Indian companies are increasingly pursuing "reverse flip" deals to go public on Indian markets.
Liquidity challenges in private equity
Private equity firms are navigating liquidity challenges, evolving investor expectations, and a volatile macroeconomic environment, influencing their strategic choices in fundraising, portfolio company liquidity events, capital distributions, and deal structures. These strategies meet LPs' liquidity and performance needs and potentially unlock 20% annual growth in PE dry powder, reaching US $3.8 trillion by 2028. Fundraising has been challenging, with global PE capital rising, falling to US $573 billion in 2023 from a high of US $619 billion in 2022. More considerable PE funds capture a more significant share of total fundraising, while smaller funds struggle.
Exit strategies, including IPOs, sponsor-to-sponsor deals, and corporate sales, are crucial for liquidity. The S&P 500's rising valuations may support more IPO exits. Two scenarios for PE assets under management (AUM) growth are considered: slow growth, with continued liquidity challenges and limited IPO opportunities, and fast growth, driven by widespread private IPOs and increased investor distributions. The rapid growth scenario could see fundraising top US $1.5 trillion by 2028, with total AUM reaching US $11.5 trillion.
Innovative liquidity solutions, such as midlife co-investments and NAV loans, are gaining traction. These methods provide liquidity to LPs and strengthen GP-LP relationships. Retail investors are also targeted with new fund structures offering limited private equity exposure. The importance of liquidity creation events and alternative exit strategies to meet LP needs and drive PE AUM growth is emphasized. The Deloitte Center for Financial Services’ model forecasts global PE AUM growth using variables like IPO exits, PE-backed IPO value changes, and public equity market growth.
Source: Deloitte
AI Scope and Trends
GenAI: Opportunities and challenges for private equity firms and portfolio companies
As GenAI gains traction across industries, private equity firms leverage its potential to enhance efficiencies, decision-making, and value creation within their operations and portfolio companies. Surveys indicate that over 64% of private equity firms plan to acquire new GenAI technology, and up to 75% are already utilizing AI or plan to do so within the following year. In 2023, private equity firms invested $2.18 billion in GenAI, more than double the previous year's total, with projections indicating further growth in 2024.
GenAI offers numerous opportunities for portfolio companies, including performance monitoring through automated data collection and real-time insights and optimizing target selection and exit planning using predictive analytics. However, the deployment of GenAI must consider existing and emerging legal frameworks, particularly regarding intellectual property, data protection, privacy, and legal privilege. Jurisdictions worldwide, including the EU, Brazil, Canada, China, and various US states, propose AI-specific regulations to address these concerns.
Private equity firms must conduct bespoke risk assessments for GenAI, considering factors such as portfolio companies' involvement in the GenAI lifecycle, the types and volumes of data used, and dependencies on third-party technology. To manage these risks, firms should conduct tailored due diligence at the investment stage and continuously analyze portfolio company arrangements with third parties, seeking appropriate contractual protections. This careful consideration will be crucial as GenAI becomes more prevalent across sectors and industries.
Source: Cleary Gottlieb
Private Markets: The 2025 Speed-up
In 2024, private equity showed signs of recovery after a challenging 2023, with deals up 36% by value and 18% by volume compared to the previous year. Fundraising in the US reached $236 billion, and Europe saw €110 billion raised by Q3 2024. However, exits remained flat, causing liquidity issues for LPs. The MSCI World index rose 18%, and the S&P increased by 25%, prompting private equity firms to list companies like Galderma, KinderCare, and StandardAero. Financing costs fell, competition among lenders increased, with debt to EBITDA multiples on US loans rising to 5.1x. This boosted exits via secondary buyouts, which accounted for over half of the US private equity exit value in Q3 2024.
Donald Trump's presidential win could further stimulate exit activity through deregulation. Global M&A activity rose by 23% in value and 6% in volume in Q3 2024. Mid-market buyouts in the US increased by 12% in the first half of 2024. Private equity dealmakers are optimistic about 2025, with 84% expecting a busier year. Co-investment opportunities are growing, with Moonfare's team reporting a 46% CAGR in deals reviewed from 2021 to 2024. Private debt fundraising reached $207 billion by Q3 2024, and secondary market activity was on track for a record year.
Venture capital showed signs of stabilizing, with valuations reversing declines and performance turning positive in early 2024. AI-related investments are expected to be a central theme in 2025. Private equity firms focus on operational improvements and technological enhancements to drive value, particularly in healthcare, technology, and manufacturing. The private markets are moving from the challenging 2022-2023 period, with a continued recovery expected in 2025.
Source: Moonfare
