Lower interest rates and less regulation in the US sparked hope in the private equity space for a much-needed deals boom in 2025. Unfortunately, those expectations have not been realized, leaving in their wake an ever-growing exit backlog and pressure to act on the high levels of untapped dry powder.
Global merger and acquisition (M&A) activity is down, and inflation is still too high for comfort, fostering uncertainty despite positive trends like stronger valuations and improving liquidity.
This calls for private equity firms to be more strategic than ever by utilizing stress testing, cash flow forecasting, and macroeconomic scenario analysis to navigate what lies ahead.
M&A Activity is Down, Inflation is Up
Source: LSEG
Compared to the same time last year, M&A activity is down across the globe (20%) and especially in the US (25%).[1] US IPO proceeds are not faring much better, taking a dip of 24%. [2]
The major driver of this is – you guessed it – the economy. Lower interest rates are very encouraging for M&As, and inflation dropping to a low of 2.4% in September 2024 offered hope that the strongest monetary tightening we have seen in decades would finally ease – a sentiment displayed in the 22% increase in global M&A activity last year. [3] Instead of continuing its downward trend, however, inflation has crept back up, keeping interest rate cuts on hold and adding more uncertainty to the current dealmaking landscape.
Exits Continue to Stall
Another critical challenge facing private equity is the ever-growing exit backlog. Years of holding onto assets due to poor exit conditions in 2022-23 have left PE firms with a growing list of maturing investments – keeping capital tied up and limiting return opportunities.[4] On top of that, there has been significant growth in asset types with higher scale and regulatory complexity, like infrastructure, which are by nature more difficult to exit.
The record-high exit backlog combined with the significant amount of undeployed capital has caused an increase in alternative exit strategies, such as sponsor-to-sponsor sales, continuation fund investments, and even dividend recapitalizations. [5]
Now, the Good News
After years of rising costs, financing for private equity buyouts finally eased in 2024, and the total value of new loans issued to private equity-backed companies nearly doubled. At the same time, valuations rebounded, allowing firms to sell more companies at higher prices.
With entry multiples rising, sponsors paid more for acquisitions but also found a stronger appetite for exits, benefiting from buyers willing to pay a premium. Meanwhile, last year was a record year for DPI, marking the first time since 2015 that distributions outpaced contributions.[4]
There is still plenty of uncertainty about the year ahead, with major questions remaining about regulation and the overall economy – including not only interest rates, but also the recently introduced tariffs affecting all US imports.
Firms that proactively model different scenarios that account for interest rate shifts, geopolitical risks, refinancing risks, and exit timing will be best positioned to navigate the potential volatility coming our way and capitalize on emerging opportunities.
Jenny Harrod is a business analytics consultant at FRG. Since joining FRG, she has become involved with FRG’s Private Capital Forecasting solution, assisting with implementation for clients and providing ad-hoc analysis. She also performs exploratory data analysis, builds machine learning algorithms, and writes and maintains technical documentation.