Introduction

After a generally challenging 2024, the private equity ecosystem entered 2025 with measured optimism. Early signs of recovery suggested the potential for renewed momentum. However, market fundamentals remain uneven, and macro-economic and geopolitical uncertainties and market volatility continue to shape fundraising and dealmaking strategies. As the year progresses, private equity sponsors and investors are adjusting their approach with a focus on resilience, liquidity and disciplined deployment, aiming to navigate volatility while positioning themselves for a more stable and active second half of the year.

Fundraising

Private capital fundraising – whether private equity, venture capital, private credit or secondaries – faced challenges in 2024, a year in which the total global private capital raised was USD1.2 trillion, the lowest amount since 2018. Preliminary reports, however, indicate that fundraising may pick up this year, with the total global private capital raised in Q1 2025 exceeding one-quarter of the total raised in 2024. While this uptick is encouraging, it is not the full picture, and Q1 2025 results may be deceptively high, owing to the post-election optimism that fuelled the economy early in the year and the 25-basis-point decrease in the Federal Reserve rate in December 2024. Although some of the shock to the economy around tariffs may have been temporary, the overall economic outlook devolved in Q1 2025, which may negatively impact fundraising for the remainder of the year.

A closer look at certain key market segments is also telling. Private equity sponsors raised USD115.5 billion globally in Q1 2025, a significant drop from the USD178.8 billion raised in Q1 2024. This multi-year decline is largely attributable to macro-economic conditions. Persistent inflation precipitated a sharp increase in US interest rates from 2022 to 2023, which, in turn, cooled dealmaking, disrupted the results of portfolio companies and slowed private equity exits. Relatedly, investors became more capital constrained because of the decrease in distributions.

In 2024, private equity exits rebounded and sponsor distributions exceeded capital contributions for the first time since 2015. Industry surveys conducted in late 2024 and early 2025 indicated that a significant number of investors intended to increase their private equity allocations. However, as the results from Q1 2025 demonstrate, the anticipated increase in funding has not materialised, and declines in exit value may negatively impact fundraising throughout 2025. Many investors are now sending the message that they need returns in order to fund future vehicles.

Further, many pension funds, including the Maryland State Retirement and Pension System (MSRPS), have determined to reduce their current asset overallocation in private equity funds. MSRPS has targeted lowering its exposure in private equity funds generally by a third while increasing its allocation among small and mid-market funds as well as seeking to deploy capital to emerging managers in Maryland.

However, not all investors are keen on investing with emerging managers. Indeed, capital has continued to concentrate among the largest funds and most experienced managers. In Q1 2025, five private equity funds raised a combined USD48.2 billion, comprising 41.7% of private equity capital raised. In the private debt segment, 97.5% of the capital raised was by firms that have raised four or more funds, with the ten largest funds accounting for 86.3% of all private debt commitments.

In the face of these ongoing fundraising challenges – concentration of capital, market volatility and increasing liquidity pressure from investors – the private capital market has adapted.

• Sponsors have established and deployed vehicles to meet the moment, such as hybrid funds, which, unlike traditional closed-ended vehicles, provide increased liquidity by offering investors periodic redemption opportunities, and special situation funds that make concentrated bets relative to market events and disconnects.
• Investors have engaged in more active investment opportunities, for instance, investing in general partners of funds.
• Investors have shifted allocations of their capital to secondaries, anticipating that investments in shorter-lived assets will generate quicker returns. In Q1 2025, secondaries accounted for 15.3% of the global private capital raised, nearly doubling the amount raised in this segment in 2024, which itself was a record year.

Fundraising in 2025 appears to be highly dependent on economic winds and development in geopolitical policies, and innovative sponsors and investors are directing the evolution of the private capital market in response.

Fund Finance

While sponsors continue to face uncertain markets and slow fundraising environments, the number of funds in the market continues to grow. The need for liquidity outpacing bank balance sheet capacity (and willingness to lend) has spurred innovation and flexibility of financing structures.

This has created opportunities for both new regulated lenders and non-bank lenders such as private credit lenders to fill the gap. Such lenders are also working with institutional lenders as syndication and club partners in various ways. For their part, sponsors are exploring additional relationship options to make capital and leverage stretch further, including increased interest in general partner and management company loans.

Market uncertainty is leading to additional innovation in the fund finance space, which has seen in the past year:

• Increased use of term loan tranches on both capital call facilities and NAV facilities, with many non-bank lenders providing these tranches.
• Alternative structures, such as separately managed account or similar structures and uncommitted credit lines, offered by institutional lenders.
• Borrowing base credit given to previously excluded high net worth investors.
• Increased popularity of rated note feeder structures coinciding with increased insurance capital.
• Increased use of continuation vehicles and secondaries financing facilities.
• Exploration of the use of collateralised loan obligations, collateralised fund obligations (both investor and sponsor-led) and synthetic risk transfers by bank lenders.

In addition to all of this innovation, 2024 brought about the first broadly syndicated, publicly rated use of securitisation in the subscription-backed space, as Goldman Sachs completed a USD500 million rated securitisation deal with various subscription credit facilities on its balance sheet.

Last year, sponsors and lenders waited for the new Institutional Limited Partners Association (ILPA) NAV-Based Facilities Guidance with bated breath. When it was finally published in July 2024, stakeholders were pleasantly surprised by the practicality of the suggestions and the ability to implement them without much additional demand on sponsor time and resources, and investors appear happy with the increased focus on transparency in communications and reporting. This positive reaction has re-energised interest in NAV financings for sponsors and lenders.

In short, innovation in the fund finance market continues to push the market to projections that it will nearly double its size over the course of the next five years.

Private Credit

Private credit continues to be a bright spot in the private equity landscape. It has grown annually for over a decade by offering greater flexibility and speed in execution to borrowers. Private credit’s upward trajectory is expected to continue in 2025.

One factor in the expansion of private credit has been its emergence in asset-based finance. Regulatory compliance and risk mitigation strategies have resulted in banks adopting more conservative lending practices and reducing their capital-intensive portfolios. As a result, banks have retrenched from asset-based transactions. Private credit firms have stepped in to fill this gap. In 2024, Apollo, Oaktree Capital, the TCW Group and Partners Group each launched an asset-based finance business or platform. The private credit market’s focus on asset-based finance looks to continue through 2025, as 58% of private credit managers surveyed by Preqin said they will prioritise an asset-based loan strategy this year.

The continued partnering of private credit firms with banks is another factor expected to grow the private credit market in 2025. These strategic partnerships include co-lending and sourcing arrangements and offer considerable benefits to all parties involved. A bank can maintain its customer relationship and continue to provide ancillary services, and at the same time reduce its credit exposure by moving assets from its balance sheet to that of the private credit fund, thereby reducing the bank’s capital requirement. The private credit fund in turn can leverage the bank’s network and gain access to a broader range of companies and potential transactions. Partnerships like those formed between Citi and Apollo, JPMorgan Chase and Cliffwater, FS Investments and Shenkman Capital Management, PNC and TCW Group, and Wells Fargo and Centerbridge to target direct lending deals are expected to continue.

M&A Climate

Private equity M&A activity entered 2025 showing early signs of recovery and renewed momentum, though sentiment remains guarded amid ongoing market volatility and policy uncertainty. According to data released by S&P Global Market Intelligence, the global market recorded USD330.25 billion in value across 5,048 private equity transactions in the first five months of 2025, marking a nearly 20% increase in deal value but a 7.5% decrease in deal volume compared to the first five months of 2024. This disconnect underscores the market’s growing emphasis on higher-quality, scalable assets. Despite persistent headwinds, private equity sponsors – under mounting pressure to deploy over USD1 trillion in dry powder accumulated in recent years – are cautiously re-entering the dealmaking arena with a focus on resilient assets and disciplined capital deployment.

Factors Constraining Dealmaking Activity

Dealmaking activity continues to face challenges from persistent macro-economic conditions (namely, elevated inflation and high interest rates), geopolitical risks and regulatory oversight.

Macro-economic conditions

While inflation has cooled from its post-pandemic highs, it continues to weigh on the pace and structure of M&A activity. US headline CPI eased to 2.4% as of mid-2025, down from 3.3% in May 2024 and 4.0% in May 2023. Nonetheless, while some believe the impact of tariffs on inflation will be overstated, recent tariff increases have prompted many economists to project that core inflation will rise again, potentially reaching 3.5% to 4% by year-end. Although some businesses continue to absorb the impact, recent Federal Reserve surveys indicate that more than half plan to pass these cost increases on to consumers in the near term.

Following 100 basis points of rate cuts since September 2024, the Federal Reserve has maintained its benchmark rate at 4.25% to 4.5% through the first half of 2025. Policymakers remain divided on the timing of future adjustments, as they balance persistent inflationary pressures with emerging signs of labour market softening. Meanwhile, long-term rates have continued to rise, with ten-year Treasury yields approaching 5% – reflecting ongoing inflation concerns and fiscal unpredictability. For private equity sponsors, this environment has made traditional debt financing more expensive and less predictable, prompting a shift towards alternative capital structures to bridge valuation gaps and preserve target returns.

Geopolitical risks

Geopolitical instability continues to shape the private equity M&A landscape, particularly for cross-border transactions. The Russia–Ukraine war, conflict in the Middle East and strained US–China relations have disrupted global supply chains and introduced added delays and complexity to deal execution. In the USA, the Trump administration’s use of tariffs and its unpredictable trade posture have added a further layer of uncertainty for companies with international exposure. These dynamics have complicated diligence processes, hindered the accurate analysis of EBITDA of many targets and extended transaction timelines. In response, many dealmakers are pivoting towards domestic or nearshoring strategies to reduce geopolitical risk and mitigate supply chain disruption. Heightened trade friction has also made cross-border valuation modelling more challenging, leading sponsors to increasingly incorporate contingent consideration provisions and price adjustment mechanisms into deal terms to manage volatility and execution risk.

Regulatory oversight

Expectations for a more relaxed antitrust environment under President Trump’s second term have not come to fruition. The Department of Justice (DOJ) and Federal Trade Commission continue to apply rigorous merger review standards, particularly for large-cap transactions and highly consolidated sectors. Both agencies have reaffirmed the merger guidelines established by the previous administration, signalling continued scrutiny of transactions that may diminish competition. Although DOJ leadership has indicated a willingness to resolve certain concerns through negotiated remedies, regulatory approval remains a significant gating issue in complex transactions. In response, dealmakers are adopting more proactive strategies, including early risk assessments and pre-filing consultations, to identify and address potential issues. Private equity sponsors pursuing platform and add-on acquisitions are also placing greater emphasis on monitoring cumulative market share across their portfolios to pre-empt potential antitrust scrutiny.

The Trump administration’s immigration enforcement policies may have a significant detrimental impact on businesses with large unskilled labour forces, including those in the middle market, and particularly those in industries like hospitality and agriculture that often employ high levels of foreign-born individuals. The disruption in the labour force caused by these policies is a significant concern for both private equity sponsors with current investments in those businesses as well as those analysing acquisition opportunities.

Industry Sector Implications

In 2025, deal activity remains subdued across several industry sectors. Elevated interest rates and tighter credit conditions continue to weigh on real estate and consumer sectors, where persistent margin pressure and shifting demand patterns have widened valuation gaps. Private equity deal activity has slowed in financial services due to ongoing regulatory uncertainty and sustained margin compression. Within industrials and infrastructure, cross-border and capital-intensive segments remain constrained by trade friction, supply chain volatility and higher financing costs.

By contrast, M&A activity remains strong in sectors positioned for long-term structural growth.

• Technology remains a top performer, with IT deal value reaching a ten-quarter high earlier this year. Sponsors are focused on vertical SaaS, AI-driven platforms and cybersecurity assets, where accelerating demand for digital transformation, generative AI and business automation is fuelling investment momentum. This aligns well with the “lighthouse industries” identified by Maryland’s governor, including information technology.
• Healthcare deal activity is supported by demographic tailwinds and rising demand for outpatient and tech-enabled care, further bolstered by policy initiatives targeting disease prevention and personalised medicine. This is welcome news for Maryland’s vibrant life sciences industry.
• Investor demand for clean and renewable energy remains strong, with energy transition and domestic oil and gas infrastructure gaining traction as key drivers of energy security and supply chain stability.
• Within industrials and infrastructure, reshoring, advanced manufacturing and logistics have seen renewed sponsor interest, driven by supply chain optimisation and public infrastructure investment.
• The services sector has also fared well, offering steady growth and operational flexibility with minimal sensitivity to economic pressures. Demand for outsourced solutions and professional services continues to support steady deal flow despite broader market uncertainty.
• Government services and defence contracting have grown more attractive amid geopolitical instability and expanded federal spending on national security, which will provide Maryland with some opportunities even as it grapples with a disproportionate impact from federal cuts and layoffs.

Types of Deals Anticipated

Although the first quarter of 2025 was cause for optimism, with a steady volume of deal activity and private equity investment, the backdrop of uncertainty, geopolitical risk and regulatory oversight has tempered growth and activity in the second quarter of the year.

Exits

Between 2010 and 2020, the amount of capital returned to buyout fund investors each year as a percentage of net asset value ranged between 20% and 30%. By 2024, that ratio had fallen to its lowest since 2008, hovering at around 11%, which is anticipated to be replicated in 2025. In Q1 2025, the US mid-market sector, which recorded USD29.6 billion in total exit value, saw a 14.3% quarter-over-quarter decline in exit value. There are two opposing outcomes that the industry could see in terms of exits in the remainder of 2025.

On the one hand, the economic and geopolitical climate may incentivise private equity firms to continue to extend holding periods, suffer a backlog of held investments and explore alternative exit options. The median holding period currently stands at around six years, up from a median of just over four years in 2020. Over half of approximately 30,000 unsold investments, worth USD1.8 trillion in the aggregate, have been held by private equity firms for at least four years.

On the other hand, some analysts predict that, based on historical patterns, holding periods are at a peak and the industry will see increased exit activity in late 2025 into 2026. Strategically, the industry-wide backlog could also compel some firms considering a late-year exit to prepare for an exit sooner in order to avoid a landscape overridden with exit candidates. Indeed, some reports indicate that, for the first time, some fund GPs have been prioritising an earlier full exit over further extending a holding period for a potentially incrementally greater return. In a poll conducted by the ILPA, 63% of participating investors responded that they preferred a “conventional exit” over a partial or minority exit, “even accepting a valuation below recent marks if necessary”.

IPOs

The second half of 2025 is also expected to see a marked increase in PE-backed companies’ initial public offerings. Although IPOs are not the traditional exit route for private equity funds, they are increasingly viewed as an alternative exit path for private equity-backed companies in industries such as technology, healthcare and consumer brands. While certain anticipated IPOs stalled in the second quarter of the year due to the volatility of public markets and uncertainty in tariff structures, a mid-year report showed a small increase in deal volume compared to the same period last year and a 17% increase in total deal value for private equity. Sources estimate that private equity holdings account for about 50% of the approximately 200 companies that are technically ready to go public but have not yet publicly announced plans to do so.

Secondaries

One alternative exit route private equity investors continue to look to as an answer to limited exit options and the illiquid nature of private equity as an asset class is secondaries. In 2024, secondary deal volume reached an all-time high, with USD162 billion in deal volume. The momentum is expected to continue through 2025. Analysts project an aggregate volume of USD185 billion for the year.

The benefit to a secondary buyer in these transactions is a lower-risk investment, potentially at a discount, in an existing, mature portfolio, with the potential for cash flow sooner than would be expected in a primary fund investment. For a secondary seller, the boom in the secondaries market could mean that even if the seller is divesting its stake at a discount to net asset value, it could still make more than its initial investment up until the time of the secondary sale.

Although secondary transactions are expected to continue to grow, they cannot yet provide an answer to funds’ liquidity crunch, as they amount to less than 5% of private equity assets under management globally, according to Bain & Company.

Minority transactions

2025 is expected to see growth in minority-stake transactions. In this type of transaction, rather than a traditional buyout, a fund acquires only a non-controlling minority interest in a target business.

Over the past two years, private equity funds have looked to minority-stake transactions as a way to diversify their asset classes and investment strategies in an environment where capital is expensive, markets are uncertain and investors are cautious. Over 2024, US minority deal value climbed 53.5% to reach USD248.9 billion. Deal volumes remained stable year on year, with approximately 3,100 transactions in each of 2023 and 2024. As of mid-June of the current year, minority deal value had grown by 61% year on year to USD169 billion, although that figure may be inflated by the USD40 billion minority investment in OpenAI. Nonetheless, minority-stake transactions are expected to continue to be leveraged by funds as an alternative investment option. One example of an industry where this has been true in the last year is sports, where a number of major private equity funds have been approved to acquire minority stakes in professional sports teams.

Minority-stake transactions are also expected to grow as a corollary of the “retail fund” trend. As many large private equity funds have begun offering funds that are accessible to wealthy investors and family offices through lower minimums and more flexible investment structures, minority-stake transactions offer an investment option to retail funds that is more “low touch” but has upside potential for smaller investors.

Add-ons

Add-ons, bolt-ons and tuck-ins became more attractive in the period after the COVID-19 pandemic. Market analysts estimated that, in 2024, such transactions accounted for anywhere between 45% and 75% of all private equity deals, depending on industry and segment of deal value. This year, however, especially due to uncertainty relating to tariffs, it is expected that private equity firms will shift their attention away from bolt-ons and focus instead on helping their portfolio companies weather operational and supply chain challenges caused by the geopolitical landscape. It is reported that between December 2024 and March 2025, the number of private equity firms considering bolt-on deals fell from 40% to 30%, driven largely by tariffs and the high cost of capital. By contrast, by the end of Q1 2025, 87% of private equity firms (up from only 17% in Q4 2024) reported focusing their efforts on working with management teams to address operational issues, both in the medium and long term.

With the transactional landscape riddled with variables and uncertainty, it remains to be seen whether these outlooks will prove true by the end of the year. What is certain, however, is that private equity funds will continue to play a key role in M&A activity and the general economy.