In our blog published early last year, Private Equity in 2024: Where Do We Go from Here, we posited private equity would rebound in 2024 following a sluggish 2022-2023 period, driven by a confluence of interrelated dynamics: (1) a stable monetary policy outlook, (2) more favorable debt capital markets, (3) a public markets rally, and (4) a mounting backlog of aging, unrealized private equity portfolio companies.
Looking back at 2024, we saw clear “signs of life” across private equity stemming from the aforementioned factors (albeit to varying degrees), translating to a marked recovery across two key industry indicators: deal flow and exit value. Deal flow and exit value among U.S. private equity firms, which sunk in 2022-2023, both rebounded nicely in 2024, with continued momentum entering 2025.
In 2024 aggregate expected U.S. private equity deal volume of $838.5 billion represented a 19.3 percent increase over 2023 deal volume of $703.0 billion1. While 2024’s projected deal volume lags the record 2021 deal volume of $1.2 trillion, 2024 will outpace the 10-year deal volume average of $722.7 billion1. Exit activity also recovered nicely in 2024; 2024 expected exit value of $413.2 billion eclipsed full-year 2022 and 2023 totals of $302.2 billion and $277.3 billion, respectively1. Aggregate 2024 exit value of $413.2 billion would be in-line with the 10-year average aggregate exit value of $398.5 billion1. Additionally, not reflected in exit value metrics is the burgeoning (GP-led) secondary market, whose impact on liquidity for the private equity asset class cannot be understated. The GP-led market, heavily relied on by sponsors in the absence of alternative liquidity methods, should remain a relevant (and growing) exit avenue for sponsors even as M&A markets recover. Within our own private equity portfolios, we saw distributions from our managers up ~50 percent in 2024 compared to 2023. It is important to note that the industry recovery accelerated in the second half of 2024; we expect that this momentum will translate to further positive gains in 2025 driven by an increasingly attractive market environment.
Monetary Outlook and Financing Markets Turn for the Better
Approximately 2.5 years removed from its initial interest rate actions, and ~6 months into a rate-lowering cycle, the Federal Reserve has seemingly achieved a soft landing; private equity firms today are benefitting from the least volatile macro conditions since 2021. Bid-ask spreads (the gap between buyer and seller valuation expectations), which expanded significantly in 2022, have narrowed across much of the market as sellers finally adjust to a subdued, post-2021 valuation environment.
In 2024, the average cost of debt on private equity deals decreased to 8.2 percent2 from the August 2023 peak of 9.7 percent2. Despite this, debt costs remain above historical averages; an elevated interest rate outlook means sponsors will have to navigate higher financing costs for the foreseeable future. As a result, private equity sponsors continued to over-equitize investments in 2024, which we think may actually be a positive development for the industry.
Public Markets Rally
Public markets followed a strong 2023 with a similarly strong 2024, with the S&P 500 gaining 23.3 percent in 2024, similar to 2023’s 23.9 percent gain. In February, we thought that sustained recent public market performance would positively influence private valuations. However, private equity returns, while positive, have trailed the S&P 500 over the last two years. It is worth noting that U.S. private equity is outperforming the S&P 500 in trailing 5, 7, and 10 year intervals.
We believe recently weaker relative private equity performance may be somewhat explained by the slowdown in deal activity, as sponsors tend to mark their assets conservatively with pronounced uplifts occurring at exit / other liquidity events. Thus, we would expect private equity valuations to be positively impacted as deal conditions improve. Relatedly, signals point to much improved IPO markets in 2025, which would provide increased exit optionality for private equity firms and also re-solidify connectivity between public and private markets.
Private Equity Backlog
Private equity firms amassed a large backlog of unrealized assets post-2021 as dealmaking dried up; unrealized value of private equity-held assets in the United States ballooned 131 percent from $1.1 trillion to $2.5 trillion between 2019 and 20233. Given this slowdown, the median hold period for exited private equity portfolio companies increased from ~5.5 years in 2019 to ~7.0 years in 20231. As private equity firms waited out uncertainty, industry dry powder accumulated. Between 2019 and 2023, dry powder held among U.S. firms increased from $772.3 billion to $914.5 billion3, an 18 percent increase over the period. We argued at 2024’s outset that the portfolio company backlog, combined with increased dry powder levels, would be the most significant dynamic pressuring dealmakers to transact in 2025.
Conclusion
The market's recovery in 2024 proved private equity’s resilience as an asset class, setting up what should be a productive 2025 (and beyond) for the industry. Namely, the broad factors that defined 2024’s recovery (e.g., NAV-backlog, normalizing macro environment) are still largely relevant heading into 2025. Further, while 2024 marked a resurgence of deal volume and liquidity activity, we think this should translate to bolstered industry performance in 2025. Looking ahead, we think the long-term outlook for private equity remains robust, driven by the continued attractive market opportunity as well as major secular tailwinds, namely the retail channel’s accelerating flow of capital to the asset class.
- Source: Pitchbook 2024 U.S. PE Breakdown.
- Source: Pitchbook US Loan Market M&A Monthly Trend Lines December 2024.
- Represents unrealized value held by North American private equity firms analyzed from Preqin database reported under the Buyout, Balanced, and Growth strategies.
