Private equity cash flow of $2 trillion is set to boost M&A opportunities in 2025.
Private equity firms have unprecedented ammunition: nearly $2 trillion in outstanding capital. Often referred to as “dry powder,” this pile of cash has been accumulating since the last major global M&A explosion, in 2021, when it reached $5.9 trillion, according to Dealogic. The following year, activity fell by 38.8%, and it has been relatively quiet since then.
“We had a general slowdown in private equity exits in 2023 and 2024,” says Alan Dermarkar, co-head of US private equity at global law firm A&O Shearman. High interest rates were a problem; High borrowing costs and low returns created a mismatch in valuations, ultimately reducing the size, scope and attractiveness of private equity deals.
“The leverage was very difficult,” Dermarkar points out.
According to an Ernst & Young report, private equity activity returned somewhat in 2024, with its value up 36% compared to 2023. Valuation gaps narrowed and more deals were completed, but it was not a full recovery to pre-slowdown levels. .
In 2025, it will be different. Many funds are starting to feel less cautious, and a significant portion of uncommitted capital is expected to be deployed.
“I think there’s pent-up demand being released now,” Dermarkar says, citing lower interest rates and expectations that President-elect Donald Trump’s administration will be more friendly toward fiscal consolidation. “This combination is what leads many people to believe that 2025 will be a strong year for M&A activity – especially for private equity.”
Not everyone is convinced. Coller Capital released its Private Capital Barometer survey in December, and let’s just say private equity investors weren’t happy. The report showed that nearly 80% of limited partners — those loyal backers that private equity funds rely on — turned down reinvestment opportunities with at least one of their current managers over the past 12 months.
Blame ongoing liquidity constraints.
“Limited partners are frustrated that more money has been invested in private equity than has been withdrawn in the last five years,” says Jeffrey Kadlec, founding partner at Evolution Capital Partners. “If they’re not spending that money, they’re not making that return.”
For perspective: Private equity powder peaked at $2.6 trillion in December 2023, according to S&P Global. By July, it had increased by about $50 billion.
“This uninvited capital is just waiting for a home,” Kadlec points out.
How long to wait?
The real action will come after the dust settles in the first quarter of 2025. “Private equity takes advantage of opportunities when they present themselves,” Kadlec says. But the first three months will be crucial. “We have to get through the first quarter.”
He argues that the regulatory landscape, as well as the potential for tax cuts, is likely to influence how private equity firms allocate capital and whether they choose to buy or sell. It all depends on which bills are in the queue and what will be skipped.
At the end of last year, the US corporate tax rate was flat at 21%, a level set by the 2017 Tax Cuts and Jobs Act passed by the previous Trump administration, which reduced it from the previous rate of 35%. This time, Trump is proposing to extend the TCJA and lower the corporate tax rate to 15% on domestic production.
This may motivate companies to pursue exits, and private equity firms will be ready to step in, taking advantage of favorable conditions to acquire undervalued companies, sell them at the highest possible price, or take them public. It’s anyone’s guess what that timeline will look like, but the hope is that cash will return to private equity investors “sooner rather than later,” says Kirk Kuhnert, managing partner at AE Industrial Partners.
“There is a backlog of deals that need to either go public or be sold,” he says. “I think people are optimistic that 2025 is the year you start seeing some of these deals happen.”
Where is the work?
Once private equity funds are up and running, observers expect some sectors to see higher levels of deal activity than others. For AE Industrial, whose core business is aerospace and defence, the modus operandi so far has been to take it to the moon: literally.
In 2022, the Boca Raton, Florida-based company acquired a majority stake in Firefly Aerospace. In January, Firefly plans to become the first private company to land a spacecraft on the moon, beating Elon Musk’s SpaceX.
“This is an exciting event for us and our investments,” Kuhnert says. “Defensive-oriented companies are increasingly trading.”
They do not distribute this money, and they do not achieve this return.
Private equity managers are also becoming increasingly interested in artificial intelligence. In the past year, the deployment of AI has quickly become a major focus, according to a survey by FTI Consulting, with nearly 83% of respondents saying it will prove to be very or somewhat important to their selling endeavors while 59% expect AI will change the sales process. Value creation. Within the portfolio companies.
In addition, many private equity firms are keen to integrate AI into their operations, with the majority already running pilot projects and looking to scale these initiatives across the wealth management and financial services sectors.
“Time is starting to catch up,” says Miles J. McHale Jr., senior vice president of the Cannon Financial Institute. He notes that small companies struggle to compete with larger companies that can better absorb the costs of regulatory compliance and invest in new technology.
McHale expects this trend to continue through 2025, citing four main factors: regulatory changes, technological advances, scale, and the aging workforce of financial advisors. He adds that private equity firms are at the forefront of reshaping the industry, pouring capital into mergers and technological innovation.
“Larger companies can offer more competitive rates and a wider range of services due to their size and geographic locations,” McHale says.
The need for advanced technology is also driving the consolidation process as customers demand more advanced digital solutions and platforms. Small companies that cannot invest in these technologies are forced to merge or look for an acquirer. McHale expects that companies that invest in digital transformation will have a competitive advantage in the market, making them able to achieve continued success as the industry evolves.
As for manufacturing, tariffs on certain goods or services will also affect private equity. Depending on the geopolitical climate, the additional layer of complexity brought about by higher fees will force private equity firms to stay nimble, adjusting their strategies to keep pace with the ever-evolving landscape of international trade and regulatory shifts.
“It depends on what ultimately (unfolds),” says A&O Shearman’s Dhirmarkar. “If you re-domiciliate, you can benefit from a lower tax rate. So, it should be up to the company to decide which path is best for them.”
While tariffs and international trade policies will create some headwinds, an abundance of cash on margin and a growing need for scale and technological sophistication will likely drive private equity deals in the coming year. If not, companies risk frustrating their limited partners, who will then continue to pay management fees just to keep all that dry powder there. If it remains idle for too long, fund managers could lose significant returns, although they will still get their share.
This means that 2025 will be a year of transition, as private equity firms prepare to navigate the uncertainties surrounding new management while taking advantage of the opportunities that arise. For those who are able to stay ahead of the curve, the potential for growth and strategic acquisitions can be great.
“Now there is pressure to put money to work,” says Kadlec.
