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Private equity: US Deals 2025 outlook

As markets improve and activity increases, value creation remains front and center

Private equity (PE) deal activity remained suppressed in 2024 as investors continued to wait for potential rate cuts, improved macroeconomic conditions and policy changes post the November election. Market uncertainty and premium multiples paid by private equity buyers over the last few years also made it difficult for buyers and sellers to agree on asset valuations.

When deals closed, we saw a focus on complex, carve-out and bilateral agreements, as investors sought value beyond traditional leveraged buy outs, where bid-ask spreads remained high.

Post election, markets saw improved investor sentiment around a potential return to enhanced deal activity in 2025. However, PE portfolio company performance remained muted, further highlighting the need for value creation beyond traditional investment strategies around leverage and multiple arbitrages.

Themes to watch out for:

  • Continued attention on value creation to drive differentiated returns
  • Commercial strategy coming into focus as inflation expectations subside and pricing strategy becomes a key driver of topline growth
  • Incorporating AI in business operations to drive efficiency (e.g., call center operations, software development) and build competitive advantage
  • Continued carve-out activity in this deal market as a value-enhancing opportunity
US private equity chart
US private equity chart

Note: The primary M&A data source used in the 2025 outlook is S&P Capital IQ.

Strategic thinking

After a prolonged wait-and-see period linked to higher interest rates and market uncertainty, we expect a stronger economic outlook and dealmaking environment in 2025 thanks to increased investor confidence, the Federal Reserve’s interest rate reductions and high levels of dry powder.

Against this backdrop, we anticipate a significant increase in PE deal flow. We expect carve-outs and take private deals to remain prevalent. Software may continue to be a key sector of focus for PE as predictable recurring revenue and cash flows appeal to buyers. Increased consumer spending expectations due to a strong economic outlook and rising real incomes could also support deal activity in the retail and consumer segment.

Leading funds will need to continue developing best-in-class operational capabilities to drive revenue growth and margin uplift in their portfolio companies.

Private equity stat

Looking beyond interest rates

What to watch

We expect earnings and stocks for publicly traded firms to continue rallying over the next year. Per FactSet financial data and analytics, earnings per share increased 4.92% in the last quarter of 2024 for small cap stocks (S&P 600), the typical peer group for PE portfolio companies, after six quarters of decline. This likely acceleration in public market performance could increase pressure on PE-backed firms to demonstrate differentiated earnings growth.

These market dynamics are accompanied by increased competition for limited partnership (LP) investment dollars as the number of PE funds actively raising continues to rise. Longer PE hold periods have also led to increased allocation on PE by LPs — further increasing the scrutiny on returns required to justify these allocations.

PE firms will need to drive returns above public markets by demonstrating significant improvements being instituted from value creation plans.

What to do next

Business transformation and value creation will be critical for PE firms to demonstrate competitive returns versus rallying public markets. Investors should focus on operational transformation built around a combination of strategy, technology and analytics, human capital, GenAI solutions, leadership assessment, pricing and go-to-market strategy.

Consider pricing and go-to-market strategies as key priorities in this environment:  

  • Pricing: Many companies have used record high market inflation over the last three years as a justification for price increases to customers. With an inflation environment under 3%, a renewed focus on top line items, such as a detailed pricing strategy, could be a critical lever to drive revenue growth.
  • Go-to-market: Evaluating portfolio companies’ revenue engine (sales, marketing, customer success) will be an important pathway to realizing topline growth. Aligning organization strategy and incentives can help with expanding market visibility, encouraging cross-selling, improving win rates and boosting new customer acquisition.

“A bullish dealmaking and macroeconomic environment over the next year will likely demand companies devote resources to demonstrating competitive returns through value creation.”

— Kevin Desai, US Private Equity Leader

The bottom line

Public market earnings are expected to increase in 2025 leading to heightened pressure for private markets to demonstrate competitive returns. Value creation and commercial excellence will be critical to unlocking growth.

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