2025 Outlook: Private Equity & Venture Capital

We expect private investment performance to improve, as the impact from overinvestment in 2021–22 recedes. The asset class’s long-term performance should continue to attract individual investors and managers are creating pathways for them to more easily access opportunities. While M&A and IPO exit opportunities may improve, we believe the importance of continuation vehicles as an exit path will grow. In Asia, we expect Japanese buyout and Chinese venture capital transaction activity to increase.

Private Investment Performance Should Continue to Heal Itself in 2025

Andrea Auerbach, Global Head of Private Investments

As we head into 2025, many of the factors that had an outsized effect on the private investment (PI) market environment in 2021–22 are retreating into the background.

That said, overall private market performance for the next several years will reflect the effects of overinvestment that occurred in 2021 and early 2022, prior to the end of Zero Interest Rate Policy (ZIRP). Investors that committed to 2020 and 2021 vintage year funds saw them deploy half of their capital during this overinflated period. The amount of invested capital was twice the long-term annual average and deployed at a peak in valuations for both private equity and venture capital. Then interest rates climbed, debt costs increased, valuations corrected, and transaction activity slowed considerably over the subsequent years, impacting both limited partner (LP) returns and distributions. The capital overweight to this time period is impacting short-term performance, as shown in the one-year and now three-year rolling benchmark returns.

Moving into 2025, the private markets continue to tick back to their long-term trendlines from a fundraising and capital deployment standpoint, as have valuations. While managers are working hard to deliver returns on the ZIRP-era cohort of invested capital, they are also working hard to successfully invest their remaining capital. Indeed, the capital overhang stands at its highest amount ever by our estimation, and it is being deployed into these more favorable market conditions by managers that have added or acquired dog years of experience during this market cycle. LPs that pulled back on commitments more recently will also benefit from the deployment of their program’s dry powder into the current market.

ZIRP-era investments will take time to fully work their way through programs. While that is happening, investors will continue to steadily build their program exposures by vintage year, strategy, and sector among other factors to continue to make progress toward achieving the long-term returns the private markets are known to deliver.

Private Markets Should Continue to Propagate Public Market Options in 2025

Andrea Auerbach, Global Head of Private Investments

While it was again observably quiet in the institutional private equity (PE) markets in 2024, with muted transaction and fundraising activity plus a decades-long low in distribution yields, there was a substantial uptick in creating pathways for individual investors—retail, accredited, qualified—to access the private markets. Success in these endeavors could drive an overwhelming amount of capital into the space that could overpower current market dynamics and impact returns, particularly in the upper registers of the private markets. Long-standing private markets investors may be best served migrating their capital away from where this constituency is likely to set up shop.

Many managers have been preparing to serve this market, actively acquiring private market strategies to create a full suite of PI offerings on their platforms. In 2024, there was an increase in the launch of interval funds, private fund offerings, and private business development companies. Independent distribution platforms providing fund access to qualified purchasers and accredited investors also expanded their beachheads and increased their offerings. Not to be left out, several registered investment advisors announced acquisitions of/investments in private markets–focused advisors to add the capability to their existing platforms. These trends are expected to continue in 2025.

From a “careful what you wish for” perspective, successfully reaching these investors is not without its challenges. There is an estimated $56 trillion in US household assets alone. If just 5% of that capital is redeployed into private investments, an additional $2.8 trillion is on its way. For reference, Cambridge Associates reported a grand total of $2 trillion in net asset value across its US Private Equity and Venture Capital benchmarks as of December 2023; for the same period, Preqin reported private credit assets at $2 trillion. Increasing supply by that magnitude will impact returns for the managers investing that additional capital and amplify the demands and needs of that constituency.

It is entirely possible the individual investor—as a cohort—becomes the most important investor class, shifting expectations around manager alignment with long-standing institutional investors. Implications of this capital migration include the likelihood of more regulation, a significant increase in demand for secondaries as much of this capital needs to be invested immediately, and heightened headline risk for these platforms as these individual investors make their interests known.

Buyout Transaction Activity in Japan Should Increase in 2025

Sharad Todi, Senior Investment Director, Private Equity

The number of buyout transactions through September 30, 2024 reached 102, more than the total deal count in calendar year 2023, indicating an upward trend. Although the penetration level of private equity in Japan remains lower than in other developed markets, the country is emerging as a natural harbor for leveraged buyouts. We expect buyout transition activity should increase in 2025.

On the supply side, three primary sources of deal flow are contributing to this growth. First, several family-owned small- to medium-sized enterprises struggling to find natural successors are turning to PE firms to ensure business continuity. Second, large conglomerates in Japan are streamlining their operations by divesting non-core assets, creating opportunities for PE investors. Third, the Tokyo Stock Exchange’s demand for listed companies to justify their status by improving book value and capital efficiency ratios is also increasing take-private transactions.

On the demand side, investors are drawn to Japan for several reasons. Unlike most other Asian markets, control is the norm in Japan, allowing investors to shape the company’s journey more effectively. Entry multiples in Japan usually range between 6x and 10x EV/EBITDA, lower than the typical 10+ multiples seen in other buyout markets. Plenty of low-cost debt is available, with most managers able to secure financing at 40% to 60% of enterprise value at an all-in cost below 4.0%. The terms of leverage are typically investor friendly, with banks being more relationship-focused and cooperative with borrowers dealing with struggling assets. Japan’s low economic growth rate drives corporates to pursue inorganic growth, making strategic buyers the preferred exit route for PE firms. Furthermore, Japan’s attractiveness as an investment destination in Asia has increased as China’s appeal has waned, providing large pan-Asian funds a stable market to deploy capital.

We expect these broad macro trends should persist into 2025, which will support increased PE activity levels in Japan.

Venture Capital Fundraising and Investment Activity in China Should Increase in 2025

Scolet Ma, Senior Investment Director, Private Equity

In 2024, China’s USD-denominated venture capital fundraising and investment activity sank to a decade low, driven by sluggish domestic economic growth and ongoing US-China geopolitical tensions. We are likely to see fundraising and investment activities in China VC rebound in 2025 from the 2024 lows, albeit remaining at moderate levels.

More Chinese venture capital firms are expected to return to the market for fundraising in 2025. In 2024, China VC firms came back with smaller funds, more reasonable terms, clearer investment strategies, and enhanced transparency. We expect this trend to continue in 2025. The smaller fund size is appropriate for the current market and will force VCs to be more disciplined in their investment selection.

Geopolitical risks persist for US investors. US LPs are expected to continue withdrawing from China VC due to restrictive foreign investment rules. This presents an opportunity for non-US LPs to engage with high-quality managers. However, these non-US LPs are unlikely to completely fill the void left by their US counterparts, which will leave fundraising levels at a lower level than the peak of 2020–22.

China’s stimulus packages are anticipated to stabilize economic sentiment, but it will take time for China’s structural economic issues to resolve. The CSRC’s new rules have relaxed listed Chinese companies’ merger & acquisition restrictions, creating more exit opportunities for VC portfolios. They may also support more domestic listings. This reality, along with the fact that entry valuations have adjusted downward, make for a more conducive investing environment.

This supportive environment is complemented by talented, experienced founders in many sectors from a highly competitive market. China is emerging as a global innovation center in life sciences, as evidenced by recent global acquisitions of Chinese assets.  For a host of reasons, it has also become a hub of innovation in AI, robotics, and smart manufacturing. For these reasons, VC fundraising and investment activity should increase in 2025.

Continuation Vehicles Should Become an Even More Important Exit Path for Private Equity Sponsors in 2025

Nicolas Schellenberg, Managing Director, Private Equity

In recent years, general partners (GPs) have significantly increased their use of continuation vehicles (CVs) as an exit path for portfolio companies. This trend is partly due to reduced activity in traditional exit markets such as strategic M&A and IPOs, and the need to provide liquidity to LPs. While traditional exit paths may reopen in 2025, we anticipate CV volume will continue to grow, becoming an even more vital exit route for GPs. This growth is driven by greater investor interest and increased understanding and use of CVs by mid-market PE managers.

CVs are now a recognized exit path for PE funds. More GPs have become comfortable with them and see their benefits. Specifically, it allows managers to hold on to their best assets, while at the same time offer cash to LPs that are in need for liquidity through a process that might be less complex to run than a traditional auction process. In the mid-market, smaller assets compared to large-cap buyouts lead to smaller CVs, which are easier to syndicate.

The investor landscape for CVs is rapidly evolving. For LPs of the selling funds, CVs can pose challenges, as time periods to choose between staying invested or taking liquidity are often too tight to adequately assess the merits of a CV for their program. Secondary buyers are increasingly raising funds focused on GP-led transactions, often investing solely in CVs, some exclusively in single asset CVs. Additionally, traditional PE sponsors are developing secondary buyside strategies for CVs, viewing their primary capabilities as synergistic. These institutional fund managers are raising more and more capital from LPs that are attracted by the promise of better risk-adjusted returns and shorter holding periods.

Given the benefits CVs offer to LPs, GPs, investors, and underlying companies, we believe their importance as an exit path for PE sponsors will continue to grow, reaching a new record percentage of total sponsor-backed exit volume in 2025.

Figure Notes

Focus on the Compass, Not the Clock
Pooled private investment periodic returns are net of fees, expenses, and carried interest. Private equity includes buyouts and growth equity. Modified Public Market Equivalent (mPME) replicates private investment performance under public market conditions. The public index’s shares are purchased and sold according to the private fund cash flow schedule, with distributions calculated in the same proportion as the private fund, and mPME NAV is a function of mPME cash flows and public index returns. MSCI All Country World Index (ACWI) returns are net of dividend withholding tax. Past performance is not a reliable indicator of future results. All financial investments involve risk. Depending on the type of investment, losses can be unlimited.

Deal Activity in Japan Has Been on the Rise
Data for 2024 are through September 30. Data retrieved on November 22, 2024, and may revise.

USD-Denominated Venture Capital Activity in China Slowed in 2024
Fundraising data reflect capital raised by USD-denominated, China-based VC funds. Deal activity data reflect all VC investments made in China that are denominated in US dollars, including investments made by global/regional funds, as well as China-based funds. Data for 2024 are as of September 30.

Continuation Vehicle Usage Has Grown Quickly
Sponsor-backed exit volume includes M&A and IPO proceeds, plus estimated continuation fund volume. Percentage represents continuation fund transaction volume (numerator) over sponsor-backed exit deal volume (denominator). Expected annual volume for 2024 is based on first half 2024. Global continuation transaction volume for 2024 is based on first half actual and second half projection.