Q1 2025 PE MARKET UPDATE

TARIFF IMPACT

Tariffs have recently become a significant factor in reducing risk appetite and increasing volatility in public markets. Private equity (PE) will also be affected, but the sector is expected to navigate this period well due to ample dry powder in equity and credit strategies and longer investment horizons. Key near-term risks include exit activity, with 3,800 US PE-backed portfolio companies held for five to 12 years awaiting exit opportunities. Improved credit conditions and renewed IPO activity have sustained exit growth through Q1 2025, but divergent value expectations between buyers and sellers could stall exit momentum later in 2025.

Valuations may become challenging, with potential NAV markdowns if portfolio companies face slowing sales amid GDP deceleration. Continuation vehicles are expected to grow as firms seek alternatives to selling in volatile markets. Among the 3,800 companies, 39.4% are in the B2B sector and 19% in the B2C sector, which will likely be most exposed to increased import costs. PE firms may respond with price hikes, reduced marketing and sales spending, product range consolidation, and streamlined distribution channels. Transfer pricing and supply chain optimization will be crucial for competitive advantage.

The full impact of tariffs may take time to materialize, potentially creating a near-term air pocket for exits, capital returns, and fundraising. Despite potential NAV markdowns, this year may offer attractive entry points for new capital, aiding fundraising dynamics. Market dislocations could create significant opportunities, especially for PE buyers targeting companies needing material investment, non-backed companies with aging founders, or companies ripe for cost-cutting. PE firms are well-positioned to capitalize on these opportunities with approximately $1 trillion in corporate PE and $566.8 billion in private credit. PE's impressive track record, with 10-year rolling IRRs of around 15%, demonstrates its operational acumen through periods of uncertainty.

TECH PE ACTIVITY

The technology private equity (PE) deal landscape remains active, with an estimated 422 deals totaling $61.8 billion. This represents a 63.9% increase in deal value and a 10.6% increase in deal count quarter-over-quarter. Despite a slowdown from the peak activity of 2021 and 2022, IT deal activity remains above pre-pandemic quarterly averages from 2017 to 2019, indicating strong investment opportunities even amid macroeconomic volatility.

Key technologies like AI continue to drive investment opportunities for PE firms with ample dry powder. The largest Q1 IT deal was CenterSquare Investment Management's $12 billion growth equity investment in Aligned Data Centers, in partnership with Macquarie Asset Management. Aligned Data Centers, a tech infrastructure company, will use the funding to capitalize on growth opportunities from rising demand for AI and cloud applications.

PE DEAL VALUATIONS

Private Equity deal valuations are stabilizing, adjusting slightly from the recovery seen in 2024. After a two-year reset, EBITDA multiples bounced back to 12.7x in 2024, recovering much of their losses. Trailing 12-month multiples decreased to 12.2x in Q1 2025 but remain above pre-pandemic levels and higher than the last five-year average. It's too early to draw definitive conclusions, but EBITDA multiples may flatten from the 2024 uptick as dealmaking broadens to include lesser-quality companies.

On an EV/revenue basis, TTM Q1 2025 multiples remained flat at 2x, similar to 2024. US multiples increased in Q1, while European multiples stayed steady. Combining data from both regions provides a better sample size and reduces bias from large US take privates. Despite mixed results, valuations have clearly rebounded from their lows and are now on the mend.