While 2024 was a subdued year for deal and exit activity, we see signs that private equity has turned a corner, with promising indicators that 2025 will be an attractive vintage in which to invest, as several key cycles align favorably.
We do, however, continue to advocate for a highly selective and diversified approach to private equity investing, focusing on opportunities that resonate with global mega-trends and can capture a “complexity premium.”
Fundraising and economic cycles provide tailwind
We see evidence that fundraising has bottomed out following a significant correction over the past two years. We know that excess fundraising can dilute returns; a healthy correction points to reduced competition for deals and potentially more attractive entry valuations.
Deal activity stabilized in 2024 and remains steady – and the economic cycle is providing a further tailwind as we look ahead, with potential for rebound in new deal volumes as rates normalize against a more benign economic backdrop.
Exit activity has also stabilized, particularly in relation to sponsor-to-sponsor exits. Distributions to investors are below historical averages but remain significantly better than during the dotcom crash and global financial crisis, with potential to pick up along with a wider rebound in exit activity.
Small-mid buyouts have favorable dynamics
We favor the small to mid-sized buyout segment over the large-cap space, owing to the more favorable dry powder environment resulting from a concentration of fundraising on larger funds. This creates an especially favorable capital demand-supply balance and attractive opportunities across the broad universe of small-mid buyouts, where multiples are at a steep discount to both large buyouts and public small caps.
As of the end of Q3 2024, small and mid-sized deals had an average EBITDA/EV entry multiple discount of 6x compared to large buyouts. Similarly, compared with the Russell 2000 small cap index, small-mid buyouts currently trade at a significant discount while large buyouts are trading at a premium.
Co-investments are an attractive access point in this space, as banks have withdrawn from the lending market and credit funds have become more cautious, increasing the equity commitment required to get deals done. Meanwhile GP-led secondaries transactions continue to be compelling amid a narrowing of traditional exit routes and continued demand for liquidity solutions.
Given the dry-powder build-up for large buyouts, we also expect a further increase in sponsor-to-sponsor transactions that will provide exit opportunities for small-mid buyout funds.
AI has led to a rebound in venture
Beyond buyouts, valuations and new investment activity within venture capital have also begun to recover, driven by the technological cycle and early-stage opportunities in artificial intelligence. AI-related investments now represent 14 percent of venture deal activity, up from just 2 percent two years ago.
Conversely, while valuations for late-stage/growth investments are also rebounding, these investments face higher refinancing and valuation risks amid reduced fundraising and a still-limited IPO window.
Private equity has proven its resilience – again
Given the uncertainties that remain in the macro environment, especially related to ongoing geopolitical tensions, private equity’s resilience potential remains key. During the pandemic and the more recent run-up in inflation, private equity proved this again with an outperformance of 8 percent over the MSCI All-Country World Gross Index between 2019 and 2023.
In fact, our research shows that private equity has demonstrated superior performance during all of the major market disruptions of the past 25 years, including the dotcom crash, the GFC and the Eurozone crisis. The asset class has outperformed public markets consistently since 1998, with outperformance twice as high during crises and with smaller peak-to-trough declines.
Moreover, while different underlying strategies have driven performance during each of those crises, returning to our earlier theme small and mid-sized buyouts have been the best, or among the best, performing in four of the five crisis periods.
Looking across the private markets landscape
Private equity isn’t the only area about which we are excited.
Our models similarly indicate that 2025 will be a strong vintage for private real estate, with evidence that valuations have bottomed out following substantial re-pricing over the past two years.
We anticipate income will remain attractive for investors even as interest rates normalize. This brings additional focus to the wide spectrum of solutions within private debt and credit alternatives, given the compression in risk premiums across liquid credit markets.
Elsewhere, the energy transition segment in infrastructure remains compelling. Overall, and despite the shift in political rhetoric in the US, we expect the trend towards global decarbonization to continue driven by its strong economic rationale, with opportunities across established renewables and other rapidly emerging energy transition technologies.
Across private markets there is no shortage of attractive opportunities, but with increased attention has come increased competition. Investors should seek out areas and segments that benefit from capital inefficiencies and that are supported by fundamentals, to benefit from the potential for positive diversification private assets can offer.
Nils Rode is chief investment officer at Schroders Capital
