Private equity exits improved slightly between the second and third quarters of 2024, but still paled compared to the prior year, Preqin data shows. There were 570 exits in the third quarter worth $96 billion and 550 exits totaling a combined $97 billion in the second quarter. However, in the first three quarters of 2024, the total number of exits reached 80% of the 2023 total, but only 54% of the 2023 aggregate transaction value.
At the same time, financing conditions have improved substantially, Brandmeyer said.
“For instance, borrowing costs for a typical leveraged buyout deal, which were as high as 12% in 2023, have now fallen below 10%,” he added.
Driving growth will be sectors including AI, life sciences and biotech and the energy transition, Brandmeyer said.
“However, risks such potential tariffs, ongoing geopolitical tensions (e.g., U.S.-China relations, Middle East conflicts), and regulatory changes could introduce headwinds,” he said.
GSAM executives expect U.S. interest rates will decline in 2025, driven by a more accommodative monetary policy as inflation continues to ease.
However, should interest rates rise, private markets would face a more challenging environment with higher borrowing costs for leveraged buyouts, downward pressure on valuations and LPs shifting allocations “away from private markets and toward safer, higher-yield alternatives” such as fixed income, Brandmeyer said.
Matt Stockstill, partner and co-chairman of the private equity practice of law firm Winston & Strawn, expects a slow uptick of private equity-backed M&A in the first couple of quarters of 2025, helped along by the incoming Trump administration’s deregulation efforts.
“By the end of the year there will be significantly more volume,” Stockstill said. “It will take a little more time for changes in the system to pick up.”
There’s pent-up demand for transactions, capital to put to work, and “deals that are long in the tooth,” but interest rates will need to continue to fall, and sellers will have to adjust their expectations, Stockstill said.
“People are looking for lower interest rates, lower taxes and less regulation,” as well as less anti-trust reviews that will make it easier for clients to get deals done, he said. But as was seen in the first Trump administration, things can change quickly leading to “a decent amount of uncertainty” around policies that could drive higher inflation such as tariffs, he said.
“I don’t see interest rates going back down to zero. I don’t know what the magic number is,” he said
Still, transactions should pick up in 2025 and some of those deals will be exits, leading to more distributions to investors, Stockstill said.
Valuations
One reason is that Winston & Strawn's GP clients are looking to raise new funds but need to exit a few deals before they can do that, he said.
"Valuations have played a big role in that,” Stockstill said.
Many middle market private equity firms’ source of exit is selling their portfolio companies to larger private equity firms.
“It’s hard to get those deals done,” he said. “Fundraising has been lackluster and much of that is a need to exit,” Stockstill said.
In its Future of Alternatives 2029 report, Preqin forecasts that global private equity fundraising may not start to recover until 2027. Private equity fundraising worldwide is forecasted to be $622.1 billion in 2025, down from an anticipated $631.3 billion in 2024.
At the same time, Preqin expects that dry powder will continue to tick up, with unspent capital growing to $1.8 trillion in 2025, up from an expected $1.6 trillion in 2024. By 2029, unspent capital is expected to reach $2.8 trillion.
Most middle market firms will continue to do what they have done in the last few quarters: focus on add-on acquisitions that do not require much financing and are expected to make portfolio companies more attractive to be sold to larger buyout firms when those firms acquiring companies outright again, Stockstill said.
These add-on deals for companies GPs already own will continue into 2025, Stockstill said. There have been fewer platform deals, meaning private equity firms’ initial investment in companies, he added.
Most of the increase in transactions in 2024 were existing portfolio companies acquiring to get larger and increase their valuation, Stockstill said.
Continuation funds
To provide liquidity for investors, Stockstill said that private equity GPs will likely turn to continuation funds to provide investors liquidity in 2025.
The continuation fund strategy separates a portfolio company into a new fund, giving LPs the choice to cash out or roll their investment into the new fund. Fund managers argue that the strategy is best for assets that need more time and investment to maximize their values.
“It’s a way to inject new capital ... but it’s not the right strategy for everything,” he said.
Indeed, Mike Bego, co-founder and managing partner, Kline Hill Partners, said that 2024 is going to be a record year, closing in at around $150 billion in deal volume “that will continue the run of secondary fund deals growing about 17% a year.”
And barring any large market crash or recession, “I see 20% growth going into 2025.”
In 2024, half of the transactions were sales of limited partnership stakes “but a good chunk of them were GP-led deals.”
LPs are reluctant to embrace GP-led deals including continuation funds because they do not have experience and are concerned about possible conflict of interest issues. Those include the GPs valuation of the companies that were rolled into the continuation funds, Bego said.
GP-led deals are “much more accepted by LPs now,” he said.
Kline Hill is a secondary market firm with $4.4 billion in assets under management.
Jonathan Costello, founder of advisory firm and investment bank Devon Park Advisors, expects energy focused continuation funds, in particular, to take off in 2025.
“A few years ago, there was little interest in energy continuation funds. There’s been a ton of activity in energy continuation funds,” Costello said.
He said that the market for GP-led is undercapitalized and most buyers “are hyper-focused on recruiting and training new talent to focus on these deals,” he said.
After Labor Day, there were 10 new continuation funds launched every day for the first 10 days, he said.
“The market can’t absorb all of that content. Let alone have capital for all of it,” Costello said.
What’s more, liquidity has become a central theme for LPs in their investment decision-making, said GSAM’s Brandmeyer.
“Over the past year, many LPs have increasingly prioritized liquidity due to the slower exit environment and extended asset holding period,” Brandmeyer said.
With the exit market stalled out, LPs have not been anxious to make new commitments.
“Fundraising timelines have now stretched to average of 18 months, up from 11 months in 2020,” he noted. "LPs are demanding improved distribution-to-contribution ratios from GPs, with particular scrutiny placed on funds that have lagged in generating liquidity.”
Rough patches
Faced with exit and fundraising challenges, a number of managers are “struggling to keep the lights on,” said Matthew Swain, head of direct placements and secondaries within Houlihan Lokey’s private funds group.
Swain had been global CEO at private equity advisory firm Triago Management Development, which was acquired by investment bank Houlihan Lokey in 2024.
This is giving rise to secondary market managers raising capital to employ an activist strategy — much like some public equity managers have used for years — to take advantage of the situation, he said.
“They are lions in sheep’s clothing,” Swain said. These managers are raising capital for continuation vehicles with limited partnership agreements that give them the ability to remove the manager in the GP-led deal if the continuation fund doesn’t perform, he said.
A difficult fundraising environment could lead to some managers being open to a secondary market manager employing an activist strategy for their continuation funds, said Antoine Drean, founder and managing partner of secondary market firm Mantra Investment Partners.
These secondary market managers are angling to end up owning private equity firms with mechanisms such as having the power to move the GP in a continuation fund, he said.
