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In this episode of the NextWave Private Equity podcast, Pete Witte, EY Global Private Equity Lead Analyst, explores the current private equity landscape, where we saw a strong Q1 amid rising uncertainty.
In Q1 2025, private equity firms saw a 45% rise in deal volume compared with 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.
Key takeaways:
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.
You can also listen to this podcast on Apple and Spotify.
Announcer
The Global PE Pulse podcast from EY.
Pete Witte
Hi everyone, I'm Pete Witte and I'm the Global Lead Analyst for PE here at EY and over the next few minutes we'll talk through some of the major trends and the themes that we're seeing in the private equity market, including trends in our outlook for the deal environment, the past quarters themes and areas of focus, and then we'll close out with our outlook for the next few months. Thanks everybody for joining and let's get started with deals.
Announcer
This quarters deals environment, acquisitions, exits and financing.
Witte
You know, Lenin said, there's decades where nothing happens, and then there's weeks where decades happen. At least when it comes to geopolitics and global trade, it feels like the latter right now, as the US seeks to rewrite the rules of global trade and reorder the global economy.
Now, there's obviously a huge number of dynamics here at play. But we're going to stay focused on those that are most directly applicable to private equity, right. So what does it mean for deals and what does it mean in terms of how sponsors work with their portfolio companies?
Now we came into the year with some strong momentum. The financing markets were doing well. There was a lot of optimism for recovery in the M&A markets more broadly and because of that, the Q1 numbers wound up looking pretty good. So we saw deals valued at about $185 billion in the first quarter. That's more than double what we saw in the first quarter of last year. And it's really the highest levels that we've seen since midway through 2022.
In terms of the number of deals that was up more than 40% versus last year, but not surprisingly with rising trade tensions we're now seeing a lot more caution come into the market. And with all the uncertainty out there right now, it's just difficult to value assets.
Now as of this recording the financing markets are still functional and that's been a function of increased competition between the banks and the private credit funds, especially for deals at the larger end of the spectrum. But we shouldn't be surprised to see spreads start to widen over the next several weeks and borrowing costs start to move higher in order to account for increased risk.
Now, in our latest survey of PE GPs 43% say they're worried about being able to put together financing packages. And about a quarter say that one of their PortCos has postponed or pulled an add-on transaction over the last few weeks. So, we're starting to see some of that hesitation assert itself in the market, and that's going to extend to exits as well.
Witte
It's a similar story to what we saw in the acquisitions front where the figures look pretty good for Q1. The number of exits climbed 15% versus last year. The value of those deals increased almost 60%. We saw corporate acquirers get a lot more active, which is great because they've been absent from the market.
So, a lot of the go forward outlook here really depends on how sentiment evolves. But 40% of the portfolio has been held for more than four years at this point, so secondary buyers are likely to benefit, and I suspect the conditions that are even moderately amenable to any sort of M&A activity should see sponsors push to transact.
Announcer
This quarter's key market themes and fund priorities.
Witte
Now obviously, everybody's really focused on tariffs right now and understanding what that means. And what's interesting is that as the situation has evolved, so have the areas of focus, right. They've shifted around a little bit. Back in December, we asked folks how they were thinking about tariffs, how they were starting to get ready and then we did the same thing in March so we can compare those two time periods.
Right now, almost 90% of private equity firms are working with their PortCos to understand the supply chain impacts, that's up 17% from when we asked three months ago. So they're working with PortCos on figuring out what are the near term must dos that we really have to focus on right now. We're going to start to think about the medium term, what kind of optimizations we have to make over that time period and where it's appropriate we're going to start thinking about what might make sense in terms of longer term, higher commitment, strategic types of move.
Similarly, a majority now working with their portfolio companies on assessing the manufacturing footprints. That's up from 40% a few months ago. They're starting to work with them on the potential tax issues a lot more.
Now at the same time, we see fewer firms telling us that they are looking to reposition their portfolio via transactions, right. So the number of PortCos considering add-on deals, for example has fallen from 40% to 30%. So, there's a little bit of this shift where the operational issues in the portfolio are moving front and centre and some of the strategic repositioning that we do expect to see is taking a back seat for the moment.
Now that's not always going to be the case, right as things start to settle as we get more clarity on the valuation impacts, we'll see more of that strategic repositioning. But right now, the takeaway is that firms are just really operationally focused on helping the portfolio companies to understand this new landscape, which leads us to our outlook for the next 6 to 12 months.
Announcer
Outlook for the next 6 to 12 months.
Witte
When uncertainty increases in the way that we've seen firms don't necessarily deploy capital at scale, but they do get opportunistic and right now is probably no exception. For me, one of the more interesting findings from the survey this quarter was this. So we asked folks to describe their firm’s sentiment right now on a scale of 1 to 10 where 1 was completely risk off, 5 was about average and 10 was completely risk on. 70% of the respondents said that they were between a 6 and an 8, so there's an appetite out there for the right opportunities.
Now, what could some of those be? Well, defence, for example, hasn't historically been a significant vector for private equity investment. But if Europe moves from spending 1 or 2% of their GDP on defence to 3 or 4% of their GDP, well, that could kick off some interesting opportunities.
The domestic middle market especially in spaces in businesses with limited cross-border exposure could be interesting. Add-ons, we could see renewed attention there, especially if firms start to shift away from these larger, more complex cross-border types of platform deals. Take-privates could be another. So, the volatility that we're seeing in the public markets, if that's sustained, that could encourage a new wave of de-listings that are backed by private equity funds.
Lastly, private credit tends to excel in periods of market dislocation where traditional sources of financing are less available. And so if buyers of syndicated debts, step away from the markets as a result of all this uncertainty, well credit funds could be a beneficiary of that.
That's it for this quarter. Thanks as always for listening. Things are changing quickly so do check back in for more updates.
Announcer
The Global PE Pulse podcast from EY back next quarter.
For more on the latest market trends, go to ey.com/pepulse.
End of podcast.
