Private Equity Is Adapting to Shifting Market Dynamics
-
June 16, 2025
-
Following a sharp falloff in M&A activity during the Fed’s monetary tightening phase from mid-2022 through late-2023, deal activity was widely expected to rebound vigorously last year. It didn’t quite work out that way. Deal activity improved moderately in 2024 from depressed levels of a year earlier but fell well short of lofty expectations, as mounting economic uncertainties, escalating geopolitical risks and still high interest rates failed to propel M&A deals despite the end of monetary tightening. Subsequently, the re-election of Donald Trump was expected to unleash “animal spirits” in financial markets and the large corporate sector in 2025 but that isn’t panning out either so far this year, as tariff concerns and inconsistent messaging on trade policy from the White House have ratcheted up economic risks and caused corporate decisionmakers to hit the pause button on many M&A and capital investment decisions.
The much-awaited comeback of robust M&A activity remains much-awaited nearly 18 months after corporate credit markets began to roar and deal conditions started to become more favorable with QT monetary policy having ended. Investment capital remains plentiful, financial markets are proving resilient, and potential sellers are motivated to transact, but M&A deal activity has yet to get untracked in any big way.
Central to any discussion of M&A activity is private equity (or PE), which accounts for a growing share of such transactions in recent years, with PitchBook reporting that PE-sponsored buyouts (excluding bolt-on acquisitions) have accounted for nearly 35% of global M&A activity by deal count this decade (vs. 65% for corporate buyers) compared to 26% from 2013-2019 and 23% a decade ago.1 These are notable gains in market share for private equity, with PE share gains by deal value increasing similarly in that time per PitchBook—picking up ten percentage points of M&A market share this decade compared to average deal share in 2013-2019.
It has been a hell of a decade for private equity in most respects. Domestically, PitchBook reports that PE sponsors owned nearly 12,300 U.S. based companies (again, excluding bolt-on deals) in 2024, compared to 7,300 in 2014.2 Moreover, PitchBook reported more than $1 trillion of available investment capital (“cumulative dry powder”) by U.S. PE sponsors in 2024 compared to $350 billion a decade earlier. However, the decade ahead looks more challenging for private equity on several fronts and evidence of these challenges has begun to appear. You could say that private equity’s many successes for more than a decade have created the conditions for what lies ahead.
The foremost discussion topic in private equity circles these days is PE’s “exit problem,” that is, sponsors’ unwillingness or inability to sell-off (“harvest”) investments that have exceeded their traditional holding periods, typically around five years, despite a seeming abundance of potential buyers and investible capital (“dry powder”) across the PE landscape. This impasse has resulted in a notable uptick in the average investment holding period for many pre-2020 vintage funds, and a growing frustration among some limited partners in these PE funds who want to see mature investments sold and capital returned to investors.
When viewed by investment year, this trend becomes increasingly apparent, with the percentage of U.S. PE buyout deals held by sponsors for more than five years and seven years each increasing by approximately 12 percentage points for the most recent investment period that encompasses this time range (2018-2019) compared to corresponding percentages for buyouts done in 2010-2017 (Figure 1). Why might that be? PitchBook data offers a possible explanation that is potentially concerning. For U.S. leveraged buyout deals with publicly available transaction multiples (which we emphasize is a small percentage of LBOs done, typically 15%-20% of all such deals), median purchase price multiples were appreciably higher in 2017-2019 than median multiples for buyout deals done in 2014-2016. If these transaction multiple trends were representative of the larger deal environment, it suggests that buyout deals of the 2018-2019 cohort are being held longer because sponsors are holding out for larger exit multiples than the market will bear to generate requisite ROI/IRR that investors are expecting.
Figure 1 - U.S. LBO Deals by Investment Year
Source: PitchBook
We also hear this storyline anecdotally that sponsor-to-sponsor deals are not happening often enough because there are material “mismatches” in valuation perceptions of what potential buyers are willing to pay and what sellers are holding out for, with deal concessions not enough to bridge that gap. Moreover, the IPO path for PE exits also remains stalled and is not nearly large enough to accommodate the potential volume of PE exits, while corporate/strategic buyers also remain circumspect about doing M&A deals that meet aggressive asking prices amid conditions of growing economic uncertainty. Instead of deal exits, some large sponsors are turning to a variety of measures to drive value creation at mature companies. These include shared services platforms across their portfolio companies for back office and administrative functions, and pivoting to longer term strategies with their portfolio companies to further drive operating efficiencies and execute sustainable top line growth. These measures are increasingly being used to return capital to investors via dividend recapitalizations or negotiated purchases of some limited partner interests at discounted prices by the general partner.
There are some creative ways that opportunistic investors are employing which get money back to limited partners in PE funds in the absence of normal exit activity by sponsors. A recent Bloomberg article noted that Blackstone agreed to buy $5 billion of private equity holdings from the New York City pension system, representing investments in 125 PE funds, with Blackstone besting more than 80 potential buyers who indicated interest in these investments when the city began its auction process late last year.3 Bloomberg also noted that about $52 billion of global PE fundraising in 1Q25 was earmarked for secondary market investing,4 such as the Blackstone deal with NYC, well ahead of last year’s pace. These secondary market transactions allow selling investors to cash out of PE funds at a discount. Likewise, Yale University reportedly is in the process of trying to sell up to $6 billion of private equity and venture capital investments at a modest discount in the secondary market, which some speculate is a harbinger of similar transactions to come from other large university endowments.5
Of greater concern, the exit transaction stalemate likely will worsen over the next couple of years, as the investment vintage years of 2021-2022 represent a high watermark for the number of U.S. buyout deals done and transaction multiples paid — even higher than multiples paid in 2017-2019 per PitchBook —which is attributable to a ZIRP monetary policy that propelled valuations at the time but is now long gone. As the investment year buyout cohort of 2021-2022 approaches its five-year holding period, sponsors will be forced to reckon with market valuation multiples that in many instances are appreciably lower than those they bought-in at while potential buyers contend with borrowing rates that are materially higher than rates in the pre-QT period. Sponsors will need to assess this deal environment and decide what actions are most sensible relative to their investors’ expectations. Consequently, there is good reason to believe that average holding periods of portfolio companies will continue to trend longer as the investment cohort of 2021-2022 seasons and the harsh reality of lower exit multiples becomes more evident to sponsors.
Said more simply, PE sponsors collectively have done more buying than selling this decade, and this has contributed to the buildup of sponsor-owned U.S. portfolio companies and the backlog of mature investments, as seen in Figure 2. New investments and exits roughly offset in number from 2011-2016 but have become more lopsided since then, with new investments outpacing exits, often handily, from 2017-2024, resulting in a cumulative buildup of nearly 2,300 sponsor-owned companies in that time.6 So, this resulting buildup of PE-owned companies is a two-part development, reflecting both stepped-up acquisition activity by sponsors and longer average holding periods/fewer exits, especially since 2021. To emphasize that point, there were nearly as many PE exits in the COVID-plagued year of 2020 as there were last year (Figure 2).
Figure 2 - U.S. LBO Investments and Exits by Year
Source: PitchBook
It is no mystery why private equity investments have stepped up in recent years; investors were throwing new money at PE sponsors until very recently, with buyout fundraising slowing sharply in the last six months. PitchBook noted that fundraising by U.S. PE sponsors earmarked for leveraged buyouts averaged $275 billion annually from 2020-2024 compared to $185 billion from 2015-2019. Even so, sponsors could not deploy this money fast enough, and cumulative dry powder for U.S. PE sponsors has hovered just above $1 trillion for three consecutive years. It‘s not clear how such enormous sums of investment capital will be deployed going forward without compromising traditional investment standards and/or accepting lower IRRs for most new deals than in years past. In short, it appears that PE sponsors won’t have just an exit problem to contend with as the investing environment becomes less bountiful for aspiring buyers.
With this current dynamic of an abundance of investment capital coupled with the growing need for sponsors to monetize older investments, the obvious solution to break this logjam would be a wave of sponsor-to-sponsor deals, but that isn’t happening at the scale needed, considering the manifest motivations of both PE buyers and sellers to transact. Inexplicably, healthy deal flow still is not happening in 2025, and it is fair to start asking whether the best days for private equity investing are in the rearview mirror.
1: 2024 Annual Global M&A Report, PitchBook (January 29, 2025).
2: Q1 2025 US Private Equity Breakdown, PitchBook (April 11, 2025).
3: Marion Halftermeyer, Martin Z. Braun, “Blackstone Buys $5 Billion in PE Stakes From New York Pensions,” Bloomberg News (May 27, 2025).
4: Leonard Kehnscherper, “Private Equity Fundraising Plunges Amid Struggle to Return Cash,” Bloomberg News (May 27, 2025).
5: Maureen Farrell and Lauren Hirsch, “Yale is Rushing to Sell Billions in Private Equity Investments,” The New York Times (June 10, 2025).
6: Q1 2025 US Private Equity Breakdown, PitchBook (April 11, 2025).
Related Insights
Related Information
Published
June 16, 2025
Key Contacts
Global Segment Leader of Corporate Finance & Restructuring