2025 Private Equity Market Landscape

With additional content provided by Michael McClain, AVP, Research.

Since the 2021 peak in deal multiples and a banner year for performance, the private equity industry has encountered several challenging years for fundraising and a slew of new issues to deal with. The 2022 rise in interest rates was the initial headwind, as investment sponsors were faced with the highest borrowing costs in over a decade. However, a tepid initial public offering (“IPO”) market, valuation adjustments, and uncertainty surrounding how artificial intelligence (“AI”) may upend existing investments only added to an already complex landscape. As we look ahead to the remainder of 2025, the areas below are some of the key issues LPL Research will be watching: 

• Valuation Adjustments: As measured by Enterprise Value to Earnings Before Interest, Taxes, Depreciation, and Amortization (“EV/EBITDA”), the average global private equity valuation peaked in 2021 at 13.3X, per Pitchbook. This metric compares the total value of a company to its earnings and is best used when comparing similar firms. As seen below, EV/EBITDA declined to 10.5X in 2023, a level not seen since 2016, as both new investments were valued at lower multiples, while existing investment valuations were written down. Takeaway: Investors should be closely watching deal multiples during periods of higher interest rates, while also considering the ratio of debt to equity. The recent trend has seen an increase in the use of equity as an offset to the higher cost of debt. 

Historical Private Equity Multiples

Source: LPL Research, Pitchbook 12/31/24 

Exit Activity: Investment exits also peaked in 2021, with an exit count of 1,907 for a total value of $840.7 billion (Source: Pitchbook, 12/31/24). While the number of deals saw a strong increase year-over-year in 2024, the total value was still less than half that of 2021, indicating the average investment was smaller in size. With the frozen IPO market an uncertain source of exit liquidity, many sponsors have made use of continuation funds. These allow general partners to maintain control of valuable assets by launching a new fund, often with a single asset, thus avoiding a forced sale because a prior fund is at the end of its lifespan. While this may be positive for existing investors, the rise of continuation funds allows private investments to stay private longer, rather than going public through an IPO. Takeaway: A healthy deal environment should include several channels as a way to exit investments. The current trend is improving; however, we will still be watching total distributions to paid-in-capital and the average investment holding time. 

U.S. Private Equity Deal Exit

Source: LPL Research, Pitchbook 12/31/24 

• Dividend Recapitalizations: A dividend recapitalization occurs when the general partner of a private equity fund has an underlying investment take on additional debt to pay shareholders. For investors, this provides an immediate distribution, however, ideally, operational improvements and cash flow should be the source of any dividends. Over the long-term, this increases a company’s debt burden, interest payments, and it’s often perceived that the firm was struggling even prior to taking on new debt. Takeaway: Prefer deals paying distributions with cash flow and not debt at a higher rate. 

Summary 

While we don’t expect a return to the irrational exuberance seen in 2020/2021, the private equity market is showing signs of improvement. We expect a return to firms taking a more fundamental approach with a traditional focus on improvements in operations, management, and adding value through more thoughtful merger and acquisition synergies. This contrasts with simply investing in a private firm and selling to another financial sponsor at a higher multiple. Also, the impact of tariffs and deregulation remain areas to watch. Domestic oriented portfolio companies and those who rely on cross-border supply chains will be distinctly impacted, while deregulation efforts may open up the IPO market. As always, we advocate for diversification across vintages, strategy types, and investment sponsors.