Private Equity Adapts to Market Changes

Private equity is responding to changing market dynamics, especially following a period of reduced M&A activity due to the Federal Reserve’s tightening policies from 2022 to 2023. Despite expectations for a strong rebound in deal activity in 2024, the reality fell short due to ongoing economic uncertainties, geopolitical tensions, and high interest rates, even after the end of tightening measures. The hoped-for surge in financial markets following Donald Trump’s re-election in 2025 has not materialized either, as trade policy inconsistencies and tariff concerns have increased economic risks, leading companies to delay M&A and investment decisions.

While there was anticipation of a significant increase in M&A activity as corporate credit markets strengthened and conditions became more favorable after the end of Quantitative Tightening (QT) monetary policy, deal activity has not seen substantial growth. Although investment capital is abundant, financial markets remain stable, and potential sellers are eager to transact, M&A deals have not gained momentum in a significant way.

Private equity plays a crucial role in the landscape of M&A activity, representing a growing portion of transactions in recent years. PitchBook data shows that PE-backed buyouts (excluding bolt-on acquisitions) have accounted for almost 35% of global M&A activity by deal count this decade, compared to 26% from 2013-2019 and 23% a decade ago. This signifies a noticeable increase in market share for private equity, which has also seen gains in deal value share during this time period.

The past decade has been a successful one for private equity, with the number of U.S.-based companies owned by PE sponsors growing significantly from 2014 to 2024. Additionally, the available investment capital held by U.S. PE sponsors has exceeded $1 trillion in 2024, up from $350 billion a decade earlier. However, the future presents challenges for private equity, with early signs of these challenges emerging as a result of the industry’s past successes.

A prominent issue facing private equity today is the “exit problem,” where sponsors are hesitant or unable to divest mature investments that have surpassed their typical holding periods. This has led to an increase in the average investment holding period for pre-2020 vintage funds, causing frustration among some limited partners who seek returns on their investments.

Data from PitchBook highlights a concerning trend of U.S. PE buyout deals being held for longer periods, with a noticeable increase in deals held for more than five and seven years in recent investment periods compared to previous years. This trend underscores the challenges faced by private equity firms in successfully exiting investments and returning capital to investors, despite ample potential buyers and available capital in the market.