Private capital's year of building momentum

2024 remained a challenging year for private equity fundraisings, investments and exits. Assets purchased in the era of cheap leverage and high multiples remained locked, with many auction processes failing to take off or being interrupted, while macro-economic factors, high borrowing costs and uncertainty in advance of UK and US elections reduced appetite for deal making. This was evident particularly in the first half of the year, with sponsors turning to alternative paths to liquidity such as continuation fund transactions (at record levels), use of NAV financings, dividend recapitalisations or secondaries transactions. 

Over the course of 2024, we saw the outlook for private markets steadily improve, giving us cause for optimism as we enter 2025. Inflation and interest rates stabilised, and banks gradually returned to the leveraged financing market alongside credit funds, reducing yields and the overall cost of capital. As momentum builds on the deal side, sponsors appear primed to return to sale processes to realise assets, potentially unlocking further investment activity.

Private Equity

A number of positive trends are expected to continue in 2025 as market sentiment improves:

• Focus on exits: The aggregate value of deals increased in 2024 compared to 2023, although deal volume is down, particularly in Europe. Sponsors are focusing on fewer but larger transactions, mirroring the trend of LPs investing in fewer but larger funds (leading to greater consolidation among managers). At the same time, fundraising continues to outpace dealmaking, resulting in multi-year lows in capital deployment relative to dry powder. For many sponsors, the focus in 2025 is therefore likely to be on exiting assets that have been on their books for longer periods. 
• Competition from strategics: Cash-rich corporates increased strategic M&A activity, a trend that is likely to remain as macro- and market-based tailwinds continue. The increased competition should support M&A market fundamentals, further narrowing the valuation gaps that saw deal processes stall in the past. At the same time, attractive, stable assets may achieve higher multiples from strategics than sponsors are prepared to pay, save where they can acquire through existing portfolio companies or platforms, including the recent sale of St Modwen Homes to Apollo’s portfolio company, Miller Homes, on which we acted.
• P2Ps and carve outs: Depressed stock market valuations in the UK have led to acquisition opportunities for sponsors. Carve outs from listed companies have increased, with sponsors often prepared to purchase a division for a price representing a premium to the listed seller’s market cap. Examples include Inflexion’s acquisition of the GRC division from Marlowe plc and Ascential plc’s disposal of its product design business to Apax Partners, on which the firm acted. At the same time, the number of P2Ps in 2024 has surpassed 2023 levels with an increase in transactions featuring unlisted partial share alternatives, reflecting shareholders’ willingness to retain ongoing exposure to the company. CVC consortium’s £5.4 billion take-private of Hargreaves Lansdown plc made the news as the largest example, although activity was more prevalent at the mid-market level of the FTSE or AIM (see, for example, the Fortress offer for Loungers plc on which we acted). 
• Regulatory scrutiny: The private capital industry remains high on the regulatory agenda, with the increased scrutiny by anti-trust and other regulators leading to longer timetables and higher costs. It will be interesting to see whether the CMA’s renewed desire to pursue the Government’s pro-growth strategy (as shown in their approach to the Vodafone/Three merger clearance) also results in a more positive environment for sponsor deals in the UK.

Private Credit

Private credit has experienced remarkable growth in recent years, with global assets under management rising from USD1 trillion in 2020 to approximately USD1.7 trillion by the third quarter of 2024. While this expansion was partly driven by the retrenchment of banks, it also reflects the structural flexibility and efficiency inherent in the private credit asset class – characteristics that are increasingly relevant across other areas of financing. Key trends include:

• The return of the banks: Banks resumed lending to the leveraged finance market in 2024, encouraged by a more stable economic backdrop and falling interest rates. The return of banks led to tighter spreads and reduced borrowing costs, as well as some harmonisation of terms, with direct lenders softening documentation to compete with the distributed market. Benefiting borrowers, these developments triggered a wave of refinancings last year, a number of which were conducted as dual-track processes designed to test the market and secure the most favourable terms. A brighter outlook and the emergence of a more competitive financing market also drove an increase in leveraged buyouts in 2024, a trend we expect to continue this year, supported by a stable funding platform that increasingly favours borrowers.
• Collaboration and hybrid structures: While competition between private credit funds and banks has, in some cases, produced positive outcomes for borrowers, there is also a growing trend of collaboration among financing providers, with private credit and the broadly syndicated market starting to work together, offering tailored solutions to meet the diverse requirements of borrowers within the context of the interest rate and market risk cycle. We saw an increase in the use of hybrid structures last year, with banks providing the first lien senior-secured portion of the financing on certain deals, and direct lenders providing the junior tranches. This structure benefits both sides, as it allows private credit funds to participate in a wider range of deals and put capital to work, while banks can transfer the riskier elements of the financing to their less regulated counterparts. 
• Regulatory impact: With implementation of the final Basel III rules on the horizon, we may see banks increasingly seek to avail themselves of such hybrid structures in the coming year. In the extreme, the stricter capital requirements may hasten the move towards private credit. Regulation of the private credit market is, however, also one to watch in the coming years, with concerns being raised with increasing frequency about leverage levels and resulting systemic risk to the wider market.
• New asset classes: Beyond the M&A and corporate finance markets, private credit is expanding into other asset classes, most notably asset-based financing, and infrastructure and project financing, a trend that looks set to continue into 2025. In this space, there has been a notable increase in private credit funds with mandates focused on energy transition or infrastructure. These markets are particularly compelling for private credit due to their higher risk-return profile, tighter covenants, and long investment horizons. In particular, project finance aligns well with the needs of key investors in these funds, such as life insurers with long-term liabilities and asset-liability matching policies.

Looking ahead

Momentum is building in private markets, and the outlook for 2025 is positive. As pressures to exit assets continue to mount, and strategic interest in acquiring operationally stable, high quality assets increases, sponsors who have been able to deliver operational improvements and other “alpha generating” initiatives in their portfolio companies should reap the rewards of this discipline. This in turn should begin to unlock investment and fundraising activity, as market conditions stabilise and become more predictable, although that is likely to take more time in the face of geopolitical risks and changing regulation. The market is likely to favour those sponsors who can spot opportunities amid recent market dislocations or can provide innovative capital solutions to a range of market participants.