Four Predictions for Private Equity in 2025

As private equity (“PE”) looks toward 2025, the industry is poised to navigate a rapidly shifting landscape shaped by economic, political and technological forces. From tariffs and evolving credit markets to rising cyber threats and AI’s transformative potential, the year ahead promises both challenges and opportunities. This article explores four critical predictions for PE in 2025, offering insights into how these trends could shape the industry and the strategic responses required to thrive in uncertain times.

Tariff Shake-Up: President Trump’s Tariff Strategy Signals a New Era for Global Business

It is widely anticipated President Trump will begin utilizing executive authority to impose tariffs as a means of

Negotiating with U.S. trading partners, particularly China and Mexico, on a range of issues and
Spurring U.S. companies to consider increased domestic production.¹

As leaders from Mexico, Canada and the European Union engage with the President, and market analysts caution about the inflationary effects of widespread tariffs, the private sector is preparing for disruption. Companies are stockpiling products, reevaluating pricing strategies and supply chains and postponing investment decisions until the dust settles. President Trump’s economic team is ideologically diverse, with both traditional free market champions and “America First” advocates, suggesting there will be ongoing debate about the degree to which protectionist tools are deployed to advance vital economic and national security interests.²

Private Credit’s Next Chapter: Growth, Retail Access and Eroding Credit Quality

Private credit remains ascendant across all categories, including direct lending, which is now at least a $600 billion asset class. Fundraising is strong and dry powder is estimated to be around 30% of assets under management (“AUM”). The number of new entrants into the private credit space increased significantly in 2024, with some targeting specific industries, but many are industry agnostic. Private credit advocates are hopeful that investors in the asset class will move beyond large institutions and private funds and become more accessible to retail investors. The disintermediation of corporate leveraged lending away from broadly syndicated bank loans is well underway.

That said, more than $1 trillion of refinancing activity by speculative-grade borrowers occurred in 2024, with nearly 80% of all U.S. leveraged lending volume last year earmarked for refinancing and repricing.³ Refi deals have largely run their course for all but the riskiest credits. Moreover, leveraged loan pricing spreads have little room to move lower by historical measures, which is indicative of a surfeit of lending capital. Arguably, there is too much money chasing spec-grade borrowers, and a demand surge of new money lending in 2025 for M&A deals or other corporate purposes will be needed to absorb this supply. That means conditions are primed for weakening lending standards and aggressive borrower-friendly provisions in loan documentation — conditions that have enabled the surge in liability management exercises (“LME”) by distressed borrowers since 2022. In short, lenders who need to put money to work will be more tolerant of weaker underwriting standards and “leaky” provisions that sponsor demand. This doesn’t bode favorably for credit quality of new loans, but that is not a top concern for private credit lenders in 2025.

Despite the surge in LMEs in recent years, there is little sign of meaningful pushback by lenders with respect to permitted transactions by borrowers in new deals. Preliminary findings of lenders in our most recent leveraged lender survey indicates that nearly one-half of respondents believe that lender protections (e.g., “blockers”) against these maneuvers in loan documentation of new deals are no stronger or are weaker than those in deals that completed LMEs in 2023 and 2024, while about one-half believe that such lender protections in new deals are only modestly stronger.

Whether these market conditions will result in marginal credit quality erosion or a race to the bottom won’t be known for a couple of years. The imperative for private credit in 2025 is to put money to work — lots of it. There’s an old saying that the worst deals are done at the top of a market peak, and it feels like such a moment may be drawing near.

Cyber Risks on the Rise: Geopolitical Shifts Threaten PE Portfolios

As 2025 progresses, the geopolitical landscape is likely to drive increased threats to PE investments in jurisdictions around the world. The anticipated foreign policy of the new presidential administration in the United States potentially carries added cybersecurity risks for the PE industry. As ongoing geopolitical conflicts wind down or end completely through negotiated peace agreements, adversarial cyber-related resources that were previously dedicated for military purposes may shift towards operations that are financially motivated, such as ransomware. Additionally, increasing tensions with certain nation-states will likely exacerbate threats to investments in critical infrastructure and western investments in the Middle East.

Amplifying the risk is the continued proliferation of AI tools and their rapid adoption by threat actors, which has reduced the required skills for attacks and shortens the time from compromise to impact, resulting in faster and smaller scale attacks. In turn, PE firms and their portfolio companies must increase their detection and responses capabilities to defend against this new paradigm.

AI Will Increasingly Drive Value Creation in 2025

AI is set to revolutionize PE in 2025, shaping how firms create value and gain a competitive edge. As revealed in FTI Consulting’s "AI Radar for Private Equity 2024” survey, 59% of PE firms now view AI as a key driver of value creation, surpassing traditional strategies.⁴ In the coming year, AI is expected to impact multiple aspects of the industry, from portfolio company optimization to deal sourcing and operational efficiency.

AI will continue to be deployed at greater scale in automating routine tasks and improving operational efficiencies to reduce cost to serve, particularly in areas involving customer service, sales and marketing, product development, software development and content creation. There will also be a greater focus on examining AI’s potential to extend a portfolio company’s core business model and target addressable market through new and expanded products, services, customer segments and sales channels. PEs will also increasingly apply an AI lens when evaluating a target, taking into consideration existing platform investments or data IP relevant for AI, as well as the readiness of a target to apply AI use cases. Similarly, on the sell-side, there will be increasing focus on developing plans and narratives to make assets attractive to potential strategic buyers relative to implementing AI.

Positioning for the Future

Whether it’s navigating the ripple effects of protectionist trade policies, managing the delicate balance of opportunity and risk in private credit, fortifying defenses against increasingly sophisticated cyber threats or leveraging the transformative potential of AI in value creation, PE firms will need to stay agile and forward-thinking. By proactively addressing these challenges, the industry can position itself to capitalize on new opportunities while safeguarding its investments in an ever-changing global environment.

Footnotes:

1: Costas Pitas, “Trump vows new Canada, Mexico, China tariffs that threaten global trade,” Reuters (November 26, 2024).

2: Gram Slattery, “Who has Trump picked for top jobs in his new administration, and who’s in the running for one?” Reuters (November 12, 2024).

3: PitchBook, "Global Private Debt Report", PitchBook, H1 2024

4: FTI Consulting, “AI Takes Center-Stage for Value Creation in Private Equity Firms,” FTI Consulting.