Private equity’s $2 trillion in liquidity is expected to fuel M&A opportunities in 2025.
Private equity firms have an unprecedented war chest: approximately $2 trillion in uncalled capital. Often referred to as “dry powder,” this pile of cash has been building since the last big global M&A explosion, in 2021, when volume reached a whopping $5.9 trillion, according to Dealogic. The following year, activity fell by 38.8%, and has remained relatively calm since.
“We have seen a general slowdown in private equity exits in 2023 and 2024,” says Alain Dermarkar, US co-head of private equity at global law firm A&O Shearman. High interest rates were a problem; High borrowing costs and lower returns have created valuation asymmetries, ultimately reducing the size, scope and attractiveness of private equity deals.
“Leverage was quite difficult,” notes Dermarkar.
According to a report from Ernst & Young, private equity activity saw some return in 2024, with a 36% increase in value compared to 2023. Valuation gaps narrowed and more deals were closed. concluded, but there was no full rebound to pre-downturn levels. .
In 2025, the scenario is different. Many funds are starting to feel less prudent, and some of this uncommitted capital should be deployed.
“I think there’s some pent-up demand that’s being released,” Dermarkar says, citing falling interest rates and hopes that President-elect Donald Trump’s administration will be more pro-policy. consolidation. “This combination is what has many people thinking that 2025 will be a strong year for M&A activity, particularly for private equity. »
Not everyone is convinced. Coller Capital released its Private Capital Barometer in December, and let’s just say private equity investors couldn’t have been happy. Nearly 80% of limited partners — those once-loyal backers that private equity funds depend on — have declined reinvestment opportunities with at least one of their current managers in the past 12 months, according to the report.
The fault is persistent liquidity constraints.
“LPs are frustrated because more money has been invested in PE than has been withdrawn over the last five years,” says Jeffrey Kadlic, founding partner of Evolution Capital Partners. “If they don’t deploy that money, they don’t generate that return.”
To give perspective: Private equity dry powder peaked at $2.6 trillion in December 2023, according to S&P Global. By July, it had increased by almost $50 billion.
“This unsolicited capital is just waiting for a home,” observes Kadlic.
How long to wait?
The real measures will come after the dust settles in the first quarter of 2025. “Private equity takes advantage of opportunities when they present themselves,” says Kadlic. But the first three months will be crucial. “We have to get through the first quarter.”
The regulatory landscape, as well as the potential for tax cuts, will likely impact how private equity firms deploy their capital and whether they choose to buy or sell, he says. It all depends on which bills are pending and which will be adopted.
At the end of last year, the U.S. corporate tax rate was 21%, the level established by the administration’s Tax Cuts and Jobs Act of 2017 (TCJA). previous Trump, which reduced it from the previous 35%. This time, Trump is proposing to expand the TCJA and reduce the corporate tax rate to 15% for domestic production.
This could prompt companies to exit, and private equity firms will be ready to step in, taking advantage of favorable conditions to acquire undervalued companies, sell them at the highest possible price or take them public. What that timeline will look like is anyone’s guess, but the hope is that cash flows back to private equity investors “sooner rather than later,” says Kirk Konert, managing partner at AE Industrial Partners.
“There is a backlog of deals that either need to go public or need to be sold,” he says. “I think people are optimistic that 2025 will be the year where we start to see some of these trades happening.”
Where is the action?
Once private equity money is put to work, observers expect some sectors to see higher levels of deal activity than others. For AE Industrial, whose bread and butter is aerospace and defense, the modus operandi so far is taking them to the moon: literally.
It was in 2022 that the Boca Raton, Florida-based company acquired a majority stake in Firefly Aerospace. In January, Firefly plans to become the first private company to land a spacecraft on the Moon, beating Elon Musk’s SpaceX.
“This is an exciting event for us and for our investment,” says Konert. “Defence-focused companies are booming. »
don’t spend that money, they don’t generate that return.
Private equity managers are also increasingly interested in artificial intelligence. Last year, deploying AI quickly became a priority, according to a survey conducted by FTI Consulting in which approximately 83% of respondents said it would prove very or somewhat important to their sales efforts, while that 59% predict that AI will transform value creation. within portfolio companies.
Additionally, many private equity firms are eager to integrate AI into their operations, with the majority already running pilots and looking to expand these initiatives to the wealth management and financial services industries .
“Father time is catching up,” says Myles J. McHale, Jr., senior vice president of the Cannon Financial Institute. Smaller companies struggle to compete with larger players, who can better absorb regulatory compliance costs and invest in new technologies, he notes.
McHale expects this trend to continue through 2025, citing four key factors: regulatory changes, technological advancements, scale and the aging of the financial advisor workforce. Private equity firms are at the forefront of this industry overhaul, he adds, investing capital in consolidation and technological innovation.
“Larger companies can offer more competitive prices and a wider range of services due to their size and geographic location,” says McHale.
The need for advanced technologies is also driving consolidation as customers demand more sophisticated digital solutions and platforms. Small companies that cannot invest in these technologies are forced to merge or look for a buyer. Companies that invest in digital transformation will gain a competitive advantage in the marketplace and position themselves for continued success as the industry evolves, McHale predicts.
As for the manufacturing sector, customs duties on certain goods or services will also affect private equity. Depending on the geopolitical climate, the added complexity created by higher taxes will require private equity firms to remain nimble, adjusting their strategies to keep up with the ever-changing landscape of international trade and regulatory changes.
“It depends on what, in the end, [unfolds]says Dermarkar of A&O Shearman. “If you relocate, you can benefit from a reduced tax rate. It will therefore be up to the company to decide which path suits them best.
Although tariffs and international trade policies will create headwinds, abundant liquidity on the sidelines and the growing need for scale and technological sophistication are likely to boost private equity deals over the year ahead. come. Otherwise, companies run the risk of frustrating their sponsors, who will then continue to pay management fees just to keep all that dry powder there. If it remains inactive for too long, fund managers could miss out on significant returns, although they will still get their share.
This means that 2025 will be a year of transition, with private equity firms prepared to navigate the uncertainties of a new administration while capitalizing on the opportunities that arise. For those able to stay ahead of the curve, the potential for growth and strategic acquisition could be substantial.
“Now there is pressure for the money to be used,” Kadlic says.