Industry Trends
How technology is shaping the private equity landscape
The mid-market and small-cap private equity sector is experiencing turbulence due to inflation and political instability, leading firms to prioritize ESG practices, emerging markets, and AI/ML technologies for investment decisions. Despite holding $2.1 trillion in dry powder, firms face pressure from Limited Partners (LPs) for efficient capital allocation, with 80% of workflows relying on technology for deal sourcing, due diligence, and portfolio management. AI investments are set to increase by 95% in the next 18 months, enhancing operational efficiencies and decision-making. However, firms must navigate risks such as cybersecurity threats, unreliable data, and evolving regulatory pressures.
Technological advancements, including AI, RPA, and blockchain, are driving operational efficiencies and compliance. AI can significantly speed up deal sourcing and post-deal requirements, reducing the need for entry-level employees. The investment landscape has evolved through phases of automation, intelligent automation, and now generative AI. Firms like Blackstone and EQT are leveraging AI platforms for real-time M&A insights.
Despite reservations about AI adoption, it contributes to operational efficiency and better portfolio performance. Firms must establish robust governance frameworks and ethical guidelines to mitigate risks. Aligning AI initiatives with strategic goals and improving data quality are critical for effective AI deployment.
Private equity firms are also leveraging AI-driven predictive analytics for ESG data platforms, enhancing investment strategies and achieving higher returns. ESG-focused digital tools build transparency and trust, supporting global efforts to achieve the UN Sustainable Development Goals. Fundraising remains challenging, with economic uncertainty and market volatility as top concerns for investors.
Source: World Economic Forum
Quarter/Mid-Year Review
Private markets mid-year review 2025
Private equity managers are facing a challenging fundraising environment, with Q1 2025 figures showing the weakest first quarter since 2020, down $21.7 billion from Q1 2024. Bain & Co analysis indicates a high demand for capital, with $3 of manager demand for every $1 of LP allocation supply. Despite the M&A and IPO drought, managers have unlocked $410 billion through alternative structures like minority stake sales and NAV financings. The liquidity bottleneck is prompting shifts in investor tactics, including geographic and market segment exposure, with North America most affected by geopolitical uncertainty.
Infrastructure fundraising has thrived in H1 2025, securing $134.3 billion, surpassing the full-year total for 2024. Investors are turning to infrastructure for uncorrelated returns amid market volatility. The sector is poised for growth, driven by the need to maintain and upgrade existing infrastructure and develop new areas like digitalization and renewable energy. Despite challenges like geopolitical risks and policy shifts, the demand for infrastructure investment remains strong.
Real estate fundraising has shown a double-digit increase in H1 2025, with opportunistic strategies accounting for 30% of overall takings. The sector is recovering from disruptions like the shift to home working and high financing costs. Data centers have emerged as a key driver of real estate investment, with significant demand projected due to AI and digitalization. The bullish outlook for data centers is reshaping fundraising markets.
Private debt has delivered steady returns, with Q1 2025 fundraising reaching $74.1 billion, the highest first quarter on record. Elevated interest rates and lower leverage multiples have allowed private debt managers to underwrite deals on attractive terms. However, default risk is a concern, with high financing costs putting pressure on company balance sheets and increasing covenant breaches and the use of PIK facilities.
Source: AlterDomus
Private equity: key takeaways from Q2 2025
Global Mergers & Acquisitions (M&A) markets have shown resilience despite macro volatility and tariff-related uncertainty, with nearly US$2 trillion in deals announced this year, a 30% increase from last year. Private equity has been active, contributing 31% of the overall M&A market in the first half of the year, up from 25% in the first half of 2024. Despite initial pauses due to global trade tensions, private equity deals climbed 17% in the first half of the year, driven by large deals across diverse sectors. However, tariff uncertainty led to renegotiations, withdrawals, or postponements of transactions, with 30% of firms renegotiating deals in Q2. Investors are more concerned about second-order impacts of tariffs on GDP growth, interest rates, and consumer sentiment. Firms expect deployment activity to increase in the coming months, with nearly two-thirds of investors anticipating higher activity.
Exits remain a priority for private equity, with 215 significant exit transactions worth US$308 billion announced in the first half of the year, the highest since the first half of 2022. Strategic buyers enabled liquidity, with sales to strategics growing 26% in volume and more than doubling in value. Pressure from limited partners has led firms to be flexible on valuations, with many willing to accept discounts for immediate liquidity. Exit readiness activities are critical, with firms starting preparations 1–2 years prior to exit.
Fundraising is under pressure, with funds closed valued at US$223 billion through June, on track for a 20% decline versus last year. Despite challenges, investors remain optimistic about increased deployment activity and are prioritizing exit readiness and operational enhancements.
Source: EY
Private equity Q3 2025: Three key levers to navigate uncertainty
Uncertainty and volatility dominate the macroeconomy and global markets, but private equity valuations are attractive, offering opportunities for investors. Certain strategies may offer better risk/return profiles, particularly those focusing on transformative growth, local companies, and multi-polar innovation. Selectivity and diversification are crucial in navigating current market challenges. Attractive allocation options include balanced capital supply and demand dynamics, domestic companies insulated from geopolitical risks, opportunities arising from complexity and innovation, robust downside protection, and reduced correlation with listed markets.
Investors can mitigate challenges by focusing on local champions, transformative growth, and multi-polar innovation. Small- and mid-sized buyouts are resilient, offering attractive entry valuations, operational flexibility, defensive earnings profiles, and less cyclical exit routes. These deals typically employ modest leverage and have a predominantly local revenue base, cushioning against supply-chain disruptions and tariff changes. Continuation investments extend the value-creation runway, allowing existing fund managers to carry businesses through their next growth phase without disrupting value-creation plans. This segment has grown significantly, offering more predictable outcomes and faster return of capital.
Early-stage venture capital provides exposure to a multi-polar innovation landscape with less correlation to public markets. Innovation hubs in the US, Europe, China, India, and Asia-Pacific produce region-specific champions, contributing to portfolio diversification. Notable opportunities exist in biotechnology, which appears attractively priced after years of risk aversion, and selective potential in LP-led venture secondaries. Overall, private equity offers protection against public market volatility and thrives during down market cycles, making it a valuable asset class for investors in uncertain times.
Source: Schroders
Private equity mid-year review 2025
The private equity landscape in 2025 is marked by significant challenges and opportunities. After a promising start to the year, US tariffs have dampened recovery efforts, stalling momentum in global markets. Despite this, sectors like infrastructure, energy, and AI-driven industries remain resilient, offering opportunities for proactive firms. H2 2024 saw a 10% rise in deal volumes due to economic improvements and a rush to transact before capital gains tax increases. However, H1 2025 has been slower due to ongoing geopolitical and macroeconomic uncertainties, which have created a precarious environment for deal-making.
Platform deals have declined by 5.5% year-on-year, but consumer product and service platform deals have risen by 42%, driven by strong performance in service-oriented industries. Exit activity has dropped by 25% year-on-year, with continuation vehicles becoming more common to provide liquidity options for limited partners. The biggest barrier to deal execution is decision-making inertia, exacerbated by geopolitical risks, tariff changes, and macroeconomic uncertainty.
Interest rates are trending downward, and inflation has spiked unexpectedly, but GDP growth remains positive. The market is expected to rebound once geopolitical tensions ease and inflation stabilizes, potentially by early 2026. Private equity firms are advised to prepare for prolonged volatility, focus on resilient sectors, and refocus on long-term value creation. Proactive deal-making, rigorous due diligence, and strategies like digital transformation and market diversification are essential. Stress-testing portfolios against geopolitical and macroeconomic risks is also crucial.
In summary, while the private equity market faces significant challenges, opportunities exist for firms that remain nimble, proactive, and focused on resilient sectors and long-term value creation. The market is expected to recover as geopolitical tensions ease, with infrastructure, professional services, AI, and energy leading the way.
Source: Grant Thornton
Private credit quarterly roundup
CLO issuance is expected to remain strong, driven by experienced managers and robust investor demand. The market could see record issuance levels if the weighted average cost of debt tightens alongside increased asset supply. M&A and LBO activity are anticipated to rise in 2025 due to lower financing costs and higher C-suite confidence as recession fears diminish. Loan refinancing is expected to moderate, with a significant decrease in the near-term maturity wall, reducing refinancing pressures. Overall, the market outlook is positive, with constructive loan spreads and continued strong demand for CLOs.
The US economy showed strength in 2024, though core PCE inflation remained stubborn. Labor markets exhibited volatility, pandemic savings depleted, and delinquency rates on auto loans and credit cards increased. Despite these challenges, 2025 is seen as a compelling opportunity for Direct Lending, with a favorable setup driven by private equity firms facing investor pressure to provide liquidity and deploy new capital. The conclusion of the election process has boosted equity markets, fueling M&A volumes. With expectations for a higher-for-longer rate environment, Direct Lending is expected to offer a compelling value proposition in 2025.
Distressed credit opportunities are growing due to two decades of private equity buyouts in a low-interest environment, followed by a pandemic and significant cost structure inflation. Many underlying businesses are strategically and operationally sound but constrained by their capital structures. Private equity owners have sacrificed growth avenues to service high leverage levels. Despite unimpaired debt, equity accounts have not grown due to the doubling cost of capital for floating rate borrowings over the past three years.
Source: Invesco
Market Sentiments
Private equity exits tilted toward trade sales in H1 2025
In the first half of 2025, private equity exits via trade sales slightly decreased, with corporate acquirers continuing to strike deals as private equity fund managers sought to monetize aging portfolio investments. Exits to corporate strategics totalled 1,191, down 3% from 1,231 in the same period in 2024, according to S&P Global Market Intelligence. IPOs of private equity portfolio companies fell 31% from the previous year. Private equity fund managers face growing pressure to cash in aging investments and return capital to investors, with corporate acquirers taking advantage of the lack of competition from other liquidity sources. Corporates, despite moving more slowly in M&A transactions, benefit from a complex macroeconomic environment that restricts competition. Strong public market performance means corporations have cash for acquisitions. Six of the ten largest private equity exits in the first half were sales to corporate acquirers, including the $18.08 billion merger of Haitong Securities Co. Ltd. with Guotai Junan Securities Co. Ltd. Optimism for increased exit activity in 2025 was high, but US tariff policy disrupted global M&A markets, leading to a decline in trade sales in the second quarter. IPOs were a bright spot, with $8.98 billion in global private equity-backed IPOs in Q2. The pause in deal activity increased pressure on fund managers to make exits. The secondary market provided some relief, with private equity secondary transactions totalling $40.14 billion globally through April 30. The slow reopening of the IPO window boosts the outlook for private equity exits in the second half of the year, with interest rate cuts potentially key to unlocking exits.
Source: S&P Global
Alternatives outperform in a volatile mid-year market
At mid-year 2025, alternative investments are thriving amidst market volatility. Key themes for the second half of 2025 include portfolio resilience, opportunities in liquidity providers, secular growth in AI and sports, and the evolution of real estate. Portfolio resilience can be enhanced by incorporating less correlated return streams, mitigating downside risk, and leveraging volatility. Infrastructure investments offer consistent returns and inflation resilience, driven by long-term trends like increased power demand and U.S. infrastructure revitalization. Core infrastructure has historically delivered high single to low double-digit annualized returns.
Traditional dealmaking has slowed due to economic uncertainty and market volatility, but private equity managers are exploring secondary markets to spur investor distributions. Liquidity needs and portfolio rebalancing are driving secondary market transactions, with a growing participation from endowments and foundations.
AI-related applications are expected to surpass previous technological transitions, with significant investments in enterprise software and automation. The rapid disruption by AI necessitates careful manager selection due to potential wide dispersion in outcomes.
Sports dealmaking remains robust, supported by recurring revenue, a non-cyclical model, and global demand. The rental housing market is also expected to grow, driven by the cost disparity between renting and owning, and falling housing supply.
Overall, alternative investments offer opportunities for growth and resilience in a volatile market, with infrastructure, AI, and sports emerging as key areas of focus. Investors are advised to consider the suitability of these strategies to their needs and exercise caution considering the associated risks.
Source: J.P. Morgan
Surge in private equity firms flipping assets internally
Private equity firms increasingly used continuation funds to exit investments in the first half of 2025, as they faced challenges in finding external buyers or listing holdings. These funds, where assets are sold from one managed fund to a newer one within the same firm, accounted for $41bn in sales, representing a record 19% of all industry sales and a 60% increase from the previous year, according to Jefferies. The reliance on continuation funds comes amid a downturn in IPOs and takeover activity, limiting cash returns to investors. Private equity groups hold over $3tn in unsold deals and have returned only half the expected cash for nearly four years. Continuation funds offer investors the option to roll over or cash out their investments, allowing firms to extend the life of portfolio companies and crystallize performance fees while collecting management fees from the new fund. Notable firms like Vista Equity Partners and Inflexion used these funds to sell significant stakes, locking in gains for investors. The secondary market saw over $100bn in sales, a 50% increase from the previous year, with limited partners selling slightly more than half of the holdings. Despite their popularity, continuation funds have raised concerns among some investors about capital recycling, with many preferring conventional sales methods. However, Jefferies' Scott Beckelman expects continuation funds to remain a regular exit strategy for financial sponsors, especially for maintaining ownership of high-performing assets. Bain & Co's report indicates that two-thirds of investors still favor traditional sales methods over continuation funds.
Source: Financial Times
Market opportunity/challenges
Why private credit remains a strong opportunity
The private credit market has seen significant growth over the past decade, with corporate borrowing increasing at an annualized rate of 5.5% and commercial and industrial bank loans at about 3%. Despite resilient returns, concerns are rising about a potential private credit crisis due to the influx of capital and its impact on industry fundamentals. Investors are advised to focus on the health of borrowing companies, using metrics like EBITDA growth, leverage levels, and interest coverage ratios. Interest coverage ratios are currently at 2x, indicating heightened risk compared to public markets. Diversification across various segments of private credit, such as direct lending, GP/LP solutions, asset-backed credit, and opportunistic credit, is recommended to mitigate risks. Asset-backed credit offers diversification through numerous individual cash flow streams backed by distinct assets. The total addressable market for asset-backed finance is projected to range from $12 trillion to $20 trillion over the next decade. While a macro distress cycle is not expected, there is an uptick in distressed loan volume, creating opportunities for specialized lenders. Private credit returns have outpaced public markets, with returns as high as 12% during the 2022 spike in short-term interest rates. Manager performance variation is expected to increase due to macroeconomic factors. High-quality senior direct lending managers emphasize diversification and strong covenants. A strategic, diversified approach to private credit is crucial. Investors should carefully consider the suitability of strategies discussed, as they are subject to risks and market conditions.
Source: J.P. Morgan
