Private Markets 2025 Outlook: Resurgence in Deal Activity, Liquidity

Key Takeaways

Resurgence in Deal Activity, Liquidity

• Our investment professionals are optimistic that 2025 will see a broad resurgence in deal and exit activity across private markets
• An acceleration in deployment and liquidity should see GPs returning to market to raise additional capital, with fundraising efforts supported by investors making new commitments after receiving distributions
• Historically better yields and creditor protections, conservative capital structures, and lower losses are creating attractive opportunities within private credit’s core middle market
• We believe growth equity is set to experience a significant surge in investments focused on generative artificial intelligence use cases

Executive Summary

Favorable Conditions Boost Private Equity Optimism

As we look ahead to 2025, we anticipate a broad resurgence in new deal and exit activity within the private equity industry. Several factors contribute to this optimistic outlook:

• Normalization Post-Pandemic: The Covid-19 pandemic created significant distortions in company performance, both positively and negatively. As we distance ourselves from this period, businesses are expected to operate in a more stable environment, reducing uncertainty and fostering increased deal activity.

• Favorable Credit Conditions: With robust credit markets and a downward trend in interest rates, the cost of capital for buyouts is decreasing, making acquisitions more financially viable.

• Backlog of Exits: We expect exit activity, which was subdued in 2022 and 2023 after reaching exceptional levels in 2020 and 2021, to continue to recover in 2025.¹ Exit value is forecast by PitchBook to reach $396 billion in the US in 2024, exceeding pre-Covid levels.² Lower exit activity has created a backlog of companies that general partners (GPs) are eager to sell, with US private equity managers holding an eight-year inventory at current exit pace.³ In our experience, a surge in liquidity has followed periods of muted exit activity historically.

• Political Stability and Regulatory Shifts: Market participants widely believe that there is likely to be a significant easing of the regulatory environment under President Trump. Smaller private companies, often more burdened by regulations than larger public entities, and fund managers should stand to gain significantly from changes in reporting and compliance requirements. Regulatory relief is also anticipated in anti-trust scrutiny, which should enhance prospects for M&A activity.
• Tax Environment: Market participants also expect tax rates to decline or remain flat under the new US administration, contrasting with the anticipated expiration of previous tax cuts in 2025. Lower tax rates typically increase after-tax cash flows, which can encourage businesses to invest in growth through hiring and capital expenditures. Additionally, business owners may be more inclined to sell their companies when tax rates are lower, while reduced individual tax rates could stimulate consumer spending and economic activity.

The anticipated increase in market activity is likely to stimulate fundraising efforts among private equity managers. If fund deployment accelerates with new deals, GPs will return to the market to raise additional capital, which should be supported by investors who received liquidity from older deals and need to redeploy capital by making new commitments.

In this environment, managers with deep sector knowledge and operational capabilities should be particularly well-positioned. Their expertise is more likely to allow them to identify promising sub-sectors and companies, determine appropriate valuations, and implement strategies to accelerate growth and drive transformational change. We think this skill set is crucial during times of heightened uncertainty.

However, it is important to acknowledge that the current investment landscape for buyouts differs from the past decade. Competition has intensified, and interest rates remain higher than in recent years, potentially staying elevated for an extended period. Consequently, buyout returns may not benefit from the same tailwinds from low interest rates as before. Instead, we expect returns to increasingly depend on private equity managers’ ability to generate alpha through fundamental revenue growth and EBITDA expansion at their portfolio companies.

Primary Investments

Venture: Outlook Brightens on AI, Lower Rates

We believe venture capital (VC) will continue to be a key driver of the decades-long digital transformation of the global economy. Venture deal activity is on pace to reach $175.2 billion in 2024,⁴ above pre-COVID levels, and we are therefore cautiously optimistic that deal activity will continue to improve in 2025. We expect interest to continue to concentrate around high-quality startups with strong tailwinds – such as AI and cybersecurity. Artificial intelligence (AI) is accelerating innovation and driving significant investment across the technology stack, including AI foundational models, infrastructure, developer tools and the application layer.

Early stage AI-native companies should continue to raise significant capital over the next 12 months, and we also expect a healthy fundraising environment for existing venture-backed companies with strong fundamental growth, attractive unit economics and a visible path to profitability.

In fundraising, VC is on track in 2024 to narrowly exceed 2023’s $86.3 billion total, more than the amounts raised in each of the 2014-19 vintages.⁵ We expect limited partners (LPs) to continue to favor established managers over emerging ones, and deployment to run at a pace that gives earlier funds sufficient time to generate liquidity before returning to market.

We expect liquidity to continue to recover into 2025. Should the regulatory environment and M&A oversight ease, we believe there is meaningful dry powder among sponsors and strategic companies that are looking to invest in innovation and growth.

For investors with access to high-quality managers and companies, as well as appropriate portfolio diversification across vintage years, sectors and geographies, we believe VC continues to be a compelling opportunity.

“Should the regulatory environment and M&A oversight ease, we believe there is meaningful dry powder among sponsors and strategic companies that are looking to invest in innovation and growth.”

– Brijesh Jeevarathnam, Partner & Global Head of Fund Investments

Growth Equity

The GenAI-Powered Revolution

Powered by generative AI (genAI), we believe we are at the beginning of one of the largest technical revolutions in history, one that has the potential to change the way we work and live. Rapid advancements in genAI, which enables machines to create content ranging from text to images to videos, have already captured the imagination of investors eager to capitalize on its transformative potential.

Looking towards 2025, as leading AI companies continue to improve output efficacy and demonstrate tangible return on investment, we believe the growth equity market is set to experience a significant surge in investments focused on genAI use cases.

Beyond 2025, we can expect a proliferation of startups leveraging genAI across various sectors, including healthcare, cybersecurity, financial services, software development, and more, designed to solve important use cases.

In cybersecurity, genAI has the potential to significantly improve security by automating the identification of potential threats and by responding to security incidents in real time. In application software, we believe genAI will fundamentally change the paradigm of customer support and customer service. For example, instead of adding agent headcount to provide more support to customers, enterprises are likely to leverage genAI to reduce the number of agents needed by making them more efficient or, in some cases, by removing the need for an agent entirely.

“Looking towards 2025, as leading AI companies continue to improve output efficacy and demonstrate tangible return on investment, we believe the growth equity market is set to experience a significant surge in investments focused on genAI use cases.”

– Brian Dudley, Partner, Growth Equity

Secondary Investments

An Important Portfolio Management Tool

The secondary market experienced robust growth in 2024, with an expectation that transaction volumes will reach record levels.⁶

We expect market activity and the supply of opportunities to remain strong moving into 2025 as market participants increasingly view secondaries as a permanent fixture in portfolio management and liquidity plans.

Despite an improving M&A and capital markets backdrop, traditional exit paths remain relatively subdued, resulting in multiple years of slower than anticipated liquidity for LPs in private markets. This liquidity challenge, combined with higher interest rates and volatile public markets, has resulted in secondaries being an increasingly reliable source of deal flow across LP-led and GP-led transactions.

Our outlook for continued growth of attractive secondary opportunities in 2025 is largely driven by the factors that influenced the market in 2024, namely:

• LPs and GPs have embraced secondaries as an important tool for proactive management of their portfolios, funds, and companies;
• We expect the macro backdrop to slowly continue to improve as interest rates stabilize, while remaining above the 15-year average; and
• We expect M&A and IPO activity to see a gradual uptick.

We anticipate pricing to remain relatively flat. However we think we will continue to see a wide dispersion based on GP quality and subclass, while the proliferation of large secondary buyers and funds registered under the Investment Company Act of 1940 will continue to put upward pricing pressure on large, diversified portfolios.

Given broader fundraising challenges, we expect GPs to increasingly emphasize strengthening relationships with existing investors by restricting secondary processes to select buyers. This should benefit buyers with existing relationships and a focus on smaller secondary transactions, an undercapitalized subset of the secondary buyer universe.

Lastly, we believe attractive return generation will require both buying interests at attractive discounts and acquiring high-quality assets that are positioned to continue driving returns post-investment. As such, acquiring assets in less competitive processes with a focus on small- and mid-market buyout, which has historically offered greater potential for outperformance and value creation, should prove pivotal.

“We expect market activity and the supply of opportunities to remain strong moving into 2025 as market participants increasingly view secondaries as a permanent fixture in portfolio management and liquidity plans.”

– Jeff Akers, Partner & Head of Secondary Investments

Private Credit

Core Middle Market Offers Attractive Opportunities

Adams Street remains bullish on the outlook for private credit. In our opinion, private credit is particularly well suited for the current environment for a number of reasons, including:

• Yield levels remain at relative highs and continue to compare favorably to most credit alternatives;
• While the US Federal Reserve has begun to reduce interest rates, we believe they are likely to decline slowly and stay at relatively high levels;
• Supply of deals continues to normalize, causing competitive conditions to remain stable;
• Importantly, we believe the secular supply/demand imbalance favoring private credit investors remains intact;
• Notwithstanding public market optimism, we believe material uncertainties remain, making manager selection of paramount importance; and
• With historically better yields, better creditor protections, more conservative capital structures, and lower losses, we believe the core middle market presents an attractive sector within private credit, amid prevailing uncertainty around global economic and geopolitical outlooks.

“Importantly, we believe the secular supply/demand imbalance favoring private credit investors remains intact.”

– Bill Sacher, Partner & Global Head of Private Credit

Co-Investments

Selectivity is Key Amid Rising Competition

We are optimistic about the prospects for co-investments as we look to 2025, even as macro and geopolitical uncertainty persists.

We expect a stabilizing interest rate environment, ample credit availability and a narrowing of the bid/ask spread between buyers and sellers to result in robust overall deal activity.

We also see no reason to believe that a meaningful economic slowdown is approaching, and expect generally strong company operating performance to continue.

At the same time, we anticipate that a continued competitive deal environment – given record private equity dry powder⁷ following lower deployment in recent years – will likely lead to elevated purchase prices, especially for the highest quality assets. This increases the need to focus on building portfolios diversified across sector, time, company size and geography in leading companies alongside GPs with significant sector experience or a value creation plan under consideration.

We continue to believe that private equity owned businesses in sectors benefitting from growth, dislocation and change – such as technology, healthcare and advanced manufacturing – are well-placed to outperform.

We also expect co-investment strategies to increase in prominence, reflecting their critical role in the buyout ecosystem and as increasingly cost-conscious investors seek fee-efficient access to high-quality, diversified private equity exposure.

“We also see no reason to believe that a meaningful economic slowdown is approaching, and expect generally strong company operating performance to continue.”

– David Brett, Partner & Head of Co-Investments

1. PitchBook US PE Breakdown Q3 2024, October 8, 2024, Page 27
2. Ibid
3. Ibid
4. Source: Pitch Book NVCA Venture Monitor Q3 2024, Page 7, October 9, 2024
5. Source: Pitch Book NVCA Venture Monitor Q3 2024, Page 30, October 9, 2024
6. Source: Jefferies H1 2024 Global Secondary Market Review, Page 3, July 2024
7. Source: Preqin, S&P Global Market Intelligence Private equity dry powder growth accelerated in H1 2024, July 12, 2024

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