Leaning Into the Turbulence: Private Equity Midyear Report 2025

Private equity dealmaking faced headwinds in early 2025 due to tariff-related uncertainty, leading to a slowdown in Q2 deal value and count by over 20% compared to Q1, and effectively shutting down the IPO market. This slowdown exacerbates existing liquidity pressures, with funds struggling to return capital to LPs at historical rates, prompting some LPs to explore secondary market sales; despite challenges, PE firms are urged to focus on proactive dealmaking, due diligence, and revenue/profit growth, while also reevaluating portfolio company strategies in light of the changing global trade landscape, as significant dry powder remains available for deployment.

Analysis

The private equity market in the first half of 2025 experienced a stark dichotomy between a promising Q1 and a Q2 characterized by mounting uncertainty due to tariff turmoil. Q1 2025 initially continued the positive momentum from 2024, with global buyout deal counts aligning with the previous year's trend and deal value reaching its highest since Q2 2022, significantly boosted by large transactions like Sycamore Partners’ $23.7 billion acquisition of Walgreens Boots Alliance (WBA) and GTCR’s $24.25 billion sale of Worldpay to Global Payments (GPN). However, policy announcements in April regarding tariffs triggered significant market volatility, leading to an anticipated slowdown in Q2. April's announced deal value and count fell by 24% and 22% respectively, compared to the Q1 monthly average. This downturn was particularly evident in the IPO market, which effectively halted, exemplified by Klarna's reported pause of its US IPO plans. This slowdown exacerbates pre-existing liquidity challenges within the PE industry, as evidenced by recent fund vintages (e.g., 2018 US and Western European funds) showing a distributed to paid-in capital ratio of just over 0.6x, below the historical benchmark of approximately 0.8x. This liquidity crunch is pressuring LPs, who increasingly favor full exits over partial realizations and are turning to the secondary market, as seen with significant sales by entities like the New York City pension systems, where Blackstone (BX) was reportedly a lead buyer. Fundraising also remains difficult, with global buyout fundraising potentially facing a sixth consecutive quarter of decline and no buyout funds closing above $5 billion in Q1 2025 for the first time in a decade. Despite these headwinds and $1.2 trillion in undeployed buyout dry powder (nearly a quarter of which is four or more years old), the article suggests opportunities for proactive firms, citing 3G Capital's acquisition of Skechers (SKX) following a tariff-induced share price dip. The emphasis is now on rigorous due diligence, creative dealmaking, and a renewed focus on driving revenue and profit growth within portfolio companies, potentially leveraging tools like generative AI for productivity, as GPs must refresh value-creation plans amidst longer holding periods and a fundamentally reordered global trade landscape.

Key Decisions for Investors

• Monitor closely the evolving tariff landscape and its direct impact on portfolio company supply chains, cost structures, and international market access, adjusting valuation expectations and exit strategies accordingly.
• Consider strategic allocations to the secondary market, either to gain liquidity from existing PE fund interests or to acquire stakes at potentially discounted valuations from LPs seeking to rebalance.
• Prioritize GPs who demonstrate robust operational expertise and a clear strategy for driving organic revenue and EBITDA growth in portfolio companies, particularly in an environment where multiple expansion is less certain.
• Evaluate diversifying private equity allocations geographically, potentially increasing exposure to Europe if US-centric trade tensions persist, and consider increasing allocations to asset classes like private credit and infrastructure which may offer more predictable income streams amidst market volatility.
• Exercise caution in new fund commitments, expecting the challenging fundraising environment to continue, and rigorously assess a GP's ability to deploy capital effectively and navigate extended holding periods while still achieving target returns.