Why a better year lies ahead for private equity
After a challenging period for private equity, driven by the steepest interest rate hikes in two decades, 2024 has brought relief with the start of a monetary-loosening cycle. Uncertainty over the outcome of the US presidential election has been resolved, although the policies of the new administration may be a source of inflationary risk, and the global recessionary risks that concerned the market in 2024 have not materialised. The industry now appears well positioned for 2025.
Based on our forecasting at Preqin, we expect private equity assets under management to continue to grow, albeit at a slower pace, and to double from $5.8tn at end-2023 to reach $12.0tn by end-2029. This projected growth will be supported by structural trends, such as inflows from non-institutional investors, including family offices, wealth managers, private banks, and individual investors, who currently have relatively low exposure to private equity. This comes at a time when a tougher fundraising environment has shifted the negotiating position of LPs, leading to an expected decline in buyout management fees.
Private equity had a subdued year in 2024, with exit activity contracting sharply due to lower valuations from higher discount rates. Even so, deal-making could still match or exceed the level achieved in 2023. By the end of the third quarter this year, deal-making had achieved 69% and 74% of 2023 volume and value, respectively. However, the 5,571 deals totaling $350bn over the first three quarters of 2024 are still far from the last five-year averages of 8,378 and $610bn. Deals data will be closely watched by industry participants in 2025 for signs of an uptick, although a return to the post-Covid 19 peak seems unlikely.
While public markets have had a good 2024, driven primarily by a handful of large technology stocks, we expect private equity to continue outperforming over the medium term. We expect technology and small- to mid-market buyout funds to drive that outperformance. Private equity has invested in more tech companies (by number) than in any other sector companies over the past five years. With exits slowing over the past two years, private equity is likely to remain overweight in the technology sector given the typical investment period of five to seven years.
The global private equity industry achieved record aggregate fundraising of $781bn in 2023 – a figure that will be difficult to surpass this year due to the extended wait for interest rate cuts and global economic and geopolitical uncertainties. One key contributor to the robustness of fundraising in 2023 was the secondaries market, which raised a record $91bn, accounting for about 12% of overall industry fundraising that year. Yet there has been a slight cooling of interest in secondaries, according to our November 2024 survey of investors, which may impact secondaries fundraising in 2024. Our survey shows investors are primarily looking toward small- to mid-market buyouts, over secondaries, for the next 12 months.
Both investors and private equity managers appear more optimistic as we head into 2025, although fund managers are wary of regulatory and geopolitical risks and remain concerned about asset valuations. We believe this optimism, the long-term structural drivers behind private equity and the interest rate cycle will support fundraising and the growth of the asset class in 2025.
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Authored by Victoria Chernykh,
AVP, Research Insights at Preqin
