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Private Equity Pulse

Private Equity Pulse: key takeaways from Q1 2025

Photographic portrait of Pete Witte

7 minute read 30 Apr 2025

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Private equity sees a strong Q1 amid rising uncertainty.

In brief

Private equity firms entered the year with strong momentum and a desire to deploy significant amounts of the industry’s US$1.6t in dry powder.
Rising trade tensions and associated uncertainty, however, are leading to increased caution among investors.

The first quarter saw a significant increase in deployment versus a year ago — deals were up more than 45% by volume; large deals, including Sycamore Partner’s take-private acquisition of Walgreens, drove value to more than double what it was a year ago.

Rising trade tensions and associated uncertainty, however, are leading to increased caution among investors — currently, nearly three-fourths of general partners (GPs) expect tariffs to have a moderate negative impact on deployment activity over the next 3-6 months.

A number of tailwinds will help drive activity despite uncertainty as sector pivots

While uncertainty may cause firms to refrain from deploying capital at scale over the next several months, increased volatility often leads firms to become more opportunistic. Indeed, despite — or perhaps because of — increased market volatility, firms report elevated risk tolerances versus their usual. Nearly three-quarters of firms surveyed reported that their firm’s risk tolerance is higher than average, perhaps suggesting that many will use the market dislocation to capitalize on potential mispricing and other opportunities.

Indeed, there are a number of strategies and sectors that could benefit from global realignments:

Aerospace and Defense: Although Defense has not been a major vector for private equity investment in the past, current geopolitical trends and increasing spend — particularly in Europe, where countries may allocate an extra 1-2% of their GDP — could attract significant amounts of private equity capital.
Middle market: Opportunities will emerge across domestic middle markets, particularly in spaces and businesses with limited cross-border exposure, such as US-based manufacturing.
Distressed: Two years ago, distressed deals topped investors’ expectations as interest rates rose; they then receded as macro looked destined for a soft landing. Expectations of diminished global growth now put those deals back on the table.
Add-ons: Firms have stepped away from add-ons this year — so far, add-on deals have accounted for 51% of private equity transactions, down from 58% in 2022. However, increased volatility could see renewed attention, particularly if firms shift away from larger, more complex platform deals.
Take-privates: Volatility in the public markets, if sustained, could encourage a new wave of delistings. Already, the first quarter saw 10 take-privates valued at more than US$1b or more; in aggregate, such deals accounted for 37% of deal activity by value.
Private credit: Private credit tends to excel in periods of market dislocation when “traditional” sources of financing are less available. If buyers of syndicated debt step away from the markets as a result of uncertainty, credit funds could benefit.

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Exit routes shift as corporates get more involved

Exits remain a top priority. Market volatility and reduced mergers & acquisitions volumes over the past two years have extended hold periods significantly beyond normal. Currently, firms have more than US$4t in portfolio assets, 40% of which have been held in excess of four years. Firms entered the year hopeful that rising sentiment and increased transaction activity would generate the tailwinds needed to spur improved liquidity. And indeed, the year started strong — the number of significant exits climbed 15% by volume in Q1 versus last year, while the value of those deals increased almost 60%.

Perhaps most significantly, recent months have seen the return of corporate acquirers as buyers for private equity-backed assets. While 2024 saw a strong focus on sponsor-to-sponsor deals, the first quarter of this year saw trade sales account for 82% of deal value, up from 59% in Q1 of last year.

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Firms focus on value creation and working with portfolio companies

Firms are undertaking a number of initiatives to help their portfolio companies better prepare for and manage elevated macro uncertainty:

In contrast to three months ago, fewer firms are considering add-on transactions — the number of firms considering such deals fell from 40% to 30% between December and March. Tariff considerations are clearly an issue — about one-quarter of GPs say they’ve had add-on deals withdrawn or delayed as a result of tariff concerns. And a greater proportion — 43% — say they’re worried about being able to put together financing packages as spreads begin to widen.
Instead, firms are laser-focused on portco-level operational issues. Right now, 87% of firms say they’re working with portfolio companies to understand impacts across the supply chain — up 17% from when we polled just three months ago. Firms are helping companies to understand and execute against near-term imperatives, plan optimizations for the medium term, and where appropriate, consider longer-term strategic moves.
A majority now say that they’re helping portfolio companies to assess their manufacturing footprints, versus just 40% in January.

Periods of elevated uncertainty always lead to an increased focus on liquidity, and the current environment is no exception; currently, three-quarters of firms say they are focused more than usual on issues of liquidity and working capital. While this is certainly behind businesses’ desire to increase resilience in the face of an increasingly uncertain operating landscape, it also creates opportunity — businesses with strong balance sheets can use their liquidity to invest quickly and acquire competitors.

Other areas of elevated focus include finance and risk, as well as pricing, as firms seek to recalibrate their models for a world of rapidly changing demand curves and fluctuating input costs.

Leaning in amid uncertain times

The last two decades have been a period of tremendous growth for private equity — today, private equity firms manage more than five times the capital they did in 2005. Throughout, the industry has weathered episodes of macro dislocation and learned along the way the value of acting decisively to deploy opportunistic capital. With more than US$1.6t in dry powder at its disposal, it’s well positioned to execute against today’s challenges.

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Summary

In Q1 2025, private equity firms saw a 45% rise in deal volume compared to the previous year. However, rising trade tensions are creating caution among investors. Many firms may limit capital deployment in the coming months, yet a higher-than-average risk tolerance indicates readiness to seize new opportunities. Firms are focusing on operational improvements within their portfolios and exploring sectors like Aerospace and Defense. Additionally, the return of corporate acquirers has boosted exit activity, reflecting a dynamic shift in the private equity landscape amid ongoing uncertainty.

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About this article

Photographic portrait of Pete Witte

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.