Private equity faces brewing storm as high-quality assets command premiums amidst exit challenges

Over the past year, the private equity (PE) sector has been navigating a complex landscape marked by a mixture of resilience at the top end of the market alongside persistent challenges in deal-making and asset exits. According to analysis from The Random Walk, while there is no broad-based resurgence in PE exits, certain strategies and segments have proven more successful than others, particularly those involving large, profitable, and fast-growing companies. These high-quality assets have commanded strong prices, even as much of the industry remains caught in a holding pattern.

Data from various industry sources underscore this dual narrative. Global private equity exit value in 2024 dropped to a five-year low of $392.48 billion despite a slight increase in the number of deals, reflecting fewer but larger transactions concentrated in the upper echelons of the market. Trade sales particularly dominated exit routes, accounting for roughly half of the total exit value, as PE firms increasingly turned to corporate buyers to monetise aging portfolio investments. This strategy aligns with findings that exit multiples, especially buyout multiples, have remained historically high, indicating that top-tier assets continue to fetch premium valuations.

However, the broader picture is more nuanced. The accumulation of unsold assets has ballooned, with firms holding around $1 trillion in inventory amid ongoing global uncertainties such as high U.S. interest rates and tariff unpredictability. This build-up has pressured returns, especially on companies needing turnaround efforts, and has stalled mergers and acquisitions activity. While there is cautious optimism that M&A activity might pick up later in 2025 or in 2026, much depends on macroeconomic stability.

Market dynamics also show that general partners (GPs) face a difficult balancing act. Many are hesitant to sell assets at discounts, concerned that poor returns could jeopardise their ability to raise future funds. At the same time, they are increasingly aware that extended holding periods diminish opportunities and returns. EY’s recent surveys reflect a narrowing gap between buyers’ and sellers’ valuations, which has begun to unlock some deals. Sellers are reportedly willing to offer moderate discounts of 5-10% to accelerate exits, although this is far from a broad market thaw.

The trend of prioritising “quality over quantity” manifests in fewer but larger and more profitable deals receiving capital today. This positive selection effect means the very best assets are sold at attractive prices, while the rest continue to “ripen on the vine,” stalling returns for limited partners (LPs) and carry earnings for GPs. Time to raise new PE funds globally remains elevated compared to pre-pandemic levels, further demonstrating the ongoing challenges fund managers face in recycling capital efficiently.

In parallel with these dynamics, some GPs have adopted more entrepreneurial approaches, taking matters into their own hands rather than relying solely on conventional exit paths. This shift highlights the evolving strategies within PE firms as they adapt to the current environment.

Geographically, challenges in private markets extend into Asia, where rapid growth in private credit has not yet translated into smooth exit opportunities due to underdeveloped public markets and restricted liquidity outside India. Efforts in Japan and Korea to enhance corporate governance and market reforms provide hope for improved exit conditions in the future.

Contrasting the cautious climate for private equity, some fundraising successes point to optimism amid adversity. For example, EQT closed a €22 billion buyout fund, surpassing targets despite the headwinds posed by recent interest rate hikes. This demonstrates sustained confidence in select funds and sectors, backed strongly by private wealth investors.

Adding another layer to the landscape, investor preferences have shifted somewhat away from private equity toward hedge funds, with BNP Paribas reporting a net inflow of $22.2 billion into hedge funds as institutions seek strategies with lower market volatility exposure. This pivot reflects growing caution among large investors in the face of uncertain economic conditions.

In summary, while the private equity market continues to grapple with complex valuation mismatches, prolonged holding periods, and geopolitical uncertainties, it is also exhibiting pockets of strength. The most attractive, operationally sound assets are achieving robust exit prices, transactional activity is gradually picking up on the back of narrowing valuation gaps, and confidence in well-positioned funds persists. Yet, the industry’s broader recovery remains contingent on resolving these structural challenges and on stabilising the macroeconomic environment to spur renewed capital deployment and successful portfolio monetisation.