Private equity firms are presently navigating an expansive landscape of opportunities, bolstered by an estimated $2 trillion in uncalled capital—often referred to as "dry powder." This abundance of financial resources has been accumulating since the last major surge in mergers and acquisitions (M&A) occurred in 2021, a year that saw M&A volumes reach an impressive $5.9 trillion according to Dealogic. However, subsequent years have witnessed a significant decline in activity; in 2022, M&A activity fell by 38.8%, and the atmosphere has remained comparatively subdued since.
Alain Dermarkar, US co-head of Private Equity at A&O Shearman, remarked, “We had a general slowdown in private equity exits in 2023 and 2024,” attributing this lull to high interest rates, which led to steep borrowing costs and lower returns, consequently creating mismatches in valuations. These factors have limited the size and appeal of private equity deployments.
Despite these challenges, the tide appears to be turning. An Ernst & Young report indicated a resurgence of private equity activity in 2024, with a 36% increase in value compared to the previous year, signifying narrowing valuation gaps and the completion of more deals, albeit not reaching the dynamic levels seen prior to the slowdown.
Looking ahead to 2025, analysts and industry insiders anticipate a shift in fortunes. Kirk Konert of FTI Consulting noted that many private equity firms are starting to adopt a less cautious stance. “I think there’s a pent-up demand that’s now being released,” Dermarkar stated while elaborating on factors such as decreased interest rates and expectations that a new administration, headed by President-elect Donald Trump, will support consolidation through favourable policies. These elements are leading to expectations of a robust year for M&A activity, particularly within the private equity sector.
However, a shift in sentiment is not universally held. The private capital barometer survey conducted by Coller Capital revealed discontent amongst limited partners (LPs), with nearly 80% expressing reluctance to reinvest with at least one of their current managers over the past year due to ongoing liquidity constraints. Jeffrey Kadlic, founding partner at Evolution Capital Partners, pointed out that LPs are increasingly frustrated by the disparity between the funds invested and the returns generated, stating, “If they’re not deploying that money, they’re not generating that return.”
The dry powder figure for private equity peaked at $2.6 trillion in December 2023, as reported by S&P Global. As of July 2024, this figure had increased by nearly $50 billion. “That uncalled capital is just waiting for a home,” Kadlic observed, underscoring the need for strategic deployment.
Industry experts predict that the initial months of 2025 will be pivotal. “We got to get through Q1,” said Kadlic, emphasising that the regulatory landscape and potential tax reforms will significantly influence how private equity firms allocate their capital and decide whether to engage in acquisitions or divestments. The corporate tax rate in the U.S. had been set at 21% following the Tax Cuts and Jobs Act initiated during the previous Trump administration, which reduced it from 35%. Trump is now proposing to extend this act, suggesting a potential reduction to 15% for domestic production, an initiative that could incentivise businesses to exit, hence opening avenues for private equity engagement.
As private equity firms prepare to act, sectors such as aerospace and defence are anticipated to attract increased deal activity. For instance, AE Industrial Partners, a firm with a focus on these sectors, recently secured a majority stake in Firefly Aerospace, which plans to become the first private company to land a spacecraft on the moon in January.
Additionally, private equity firms are increasingly recognising the importance of artificial intelligence. A survey by FTI Consulting found that 83% of respondents viewed AI as significant to their sell-side activities, while 59% predicted it would transform value creation within their portfolio companies. Firms are investing in AI not just for operational efficiency but also to enhance their competitiveness in an evolving marketplace.
Myles J. McHale, Jr., senior vice president of Cannon Financial Institute, noted that smaller firms face challenges in competing against larger entities with the capacity to absorb regulatory costs and invest in new technologies. He pointed to four key factors influencing this trend: regulatory changes, technological advancements, scale, and the ageing workforce of financial advisors.
As the landscape of private equity continues to evolve, firms face a dual challenge of addressing both the technological demands of the market and the shifting complexities of international trade policies, particularly in light of import tariffs and geopolitical considerations.
With a substantial amount of capital sitting idle and evolving market dynamics, the pressure on private equity firms is mounting. “Now there’s pressure to put money to work,” Kadlic concluded, highlighting the urgency that firms must meet as they look to navigate the uncertainties and seize the opportunities that 2025 holds.
Source: Noah Wire Services