2025 Private Capital Trends – Farrer & Co
As we step into the year 2025, private capital experts from various sectors are delving into the factors that will influence the utilization of private capital in the upcoming months.
Firstly, following a somewhat subdued period of M&A activities in regions like the US, UK, and Europe during the latter half of 2024, there has been a resurgence in dealmaking confidence towards the end of the year. This renewed fervor is anticipated to carry over into 2025. The extent of deal activity and values will be contingent on a multitude of factors such as the dynamic global and regional political and economic landscapes. Notably, the UK has already seen signs of impending challenges, with the increase in gilt yields and major retailers bracing themselves for a tough road ahead, despite strong financial performance during the festive season. Nonetheless, within the UK market, it is expected that mid-market deal activities will resume after experiencing a pause post the high volume of deals leading up to the UK Budget announcement in October. There is a projection for the gap between buyer and seller price expectations to narrow down further, with an increasing trend of deferred consideration and buyer equity in deal structures. This, combined with substantial uninvested capital in private equity and private debt sectors, is poised to drive increased exit activities and the initiation of new deals. Sectors expected to witness heightened deal activities include financial services, professional services, real estate, healthcare, and media.
Moreover, a noteworthy trend is the blurring boundaries between public and private markets, offering lucrative investment prospects beyond the public sphere. This trend is driven by company boards and advisors seeking more adaptable financing structures and investors aiming to diversify their portfolios. Two specific areas of interest in the UK market are share trading for private companies and the continued movement of companies from public to private markets.
On the other hand, private credit is anticipated to undergo significant growth in 2025 due to the demand for flexible financing solutions. The perceived advantages, particularly in terms of flexibility and promptness, are expected to make private credit an attractive choice for debtors, even beyond those with private equity backing. Lenders, in turn, prefer the more creditor-friendly covenant and security packages offered by private credit over alternatives like high-yield bonds. With mutual demand from both sides, the private credit market is expected to surge throughout the year.
Furthermore, the UK’s industrial strategy, aimed at promoting growth in sectors such as advanced manufacturing, clean energy industries, creative industries, and life sciences, presents opportunities for inbound and strategic investors. Additionally, the government’s focus on housebuilding initiatives and proposed reforms in planning and leaseholder regulations offer promising prospects for investors interested in the residential development sector. This aligns with the government’s commitment to net zero goals and local community development, encouraging investors dedicated to sustainability and community well-being.
Finally, the rise of secondaries and continuation funds, along with refinancing and net asset value lending, are projected to gain momentum as investors seek liquidity and portfolio enhancement options. These vehicles provide a means for limited partners to release capital and for general partners to extend the life of their investments, ensuring sustained value creation. Such structures differ from the conventional exit strategies employed by private equity sponsors, emphasizing the need for founders, management teams, and co-investors to assess the impact of these evolving financial mechanisms on their own participation.
