After the election, we saw a wave of optimism from the finance sector, with markets expecting favorable conditions and economic growth. Many experts project that the new presidential administration will usher in a batch of M&A deals. There’s a sense that exit opportunities and large payouts are just around the corner. Investors are energized, but if you dig a little deeper, the picture for private equity (PE) may not be quite so rosy.
Beneath the surface lies a set of challenges that could create significant headwinds for PE firms in 2025: tariffs driving up inflation, interest rates on the rise, and mounting U.S. Treasury debt competing for capital. All of this could add up to slower exits, tighter valuations, and a lot of firms holding onto assets longer than planned.
The new administration has talked at length about maintaining and expanding tariffs, which likely will drive up costs across industries. These measures directly raise input prices for manufacturers, which ripple through supply chains and increase costs for businesses and consumers alike. That inflationary pressure trickles through entire industries, leading to increased expenses for portfolio companies that PE firms are counting on to perform.
As businesses face higher costs, consumer spending slows, decelerating growth. This combination — rising expenses and weaker demand — undermines valuations, making it harder for PE firms to achieve attractive exits. Selling portfolio companies under those conditions becomes a much tougher call.
Inflation and interest rates go hand in hand. To combat inflation, central banks raise interest rates, increasing the cost of capital. For PE firms, which rely heavily on debt to finance deals, higher borrowing costs make acquisitions less viable and exit strategies more uncertain.
Debt-driven deals suddenly look far less attractive when financing becomes expensive. Valuations also often take a hit as rising rates increase the cost of capital. In this environment, selling portfolio companies becomes less attractive. Potential buyers balk at inflated financing costs and weakened returns.
Adding fuel to this fire is the mounting U.S. Treasury debt, which requires ongoing refinancing. As the government borrows more to meet its obligations, it competes directly with private capital for financing. This increased demand for credit drives interest rates even higher, increases capital costs, and further complicates PE dealmaking.
The “crowding out” effect adds another layer of difficulty for PE firms already navigating a difficult financing environment.
Given the combination of rising rates, inflationary pressures, and uncertain valuations, many PE firms will likely opt to hold onto portfolio companies in 2025. Market conditions simply don’t support the attractive returns firms are looking for. Instead, PE firms are shifting their focus to operational improvements — creating more value within their portfolio companies while weathering the storm.
Holding onto assets longer might seem like the safe move, but it comes with its own challenges. Extended hold periods can strain liquidity, delay fundraising, and complicate timelines for future returns.
While PE faces challenges this year, other markets are more insulated. Venture capital (VC), for instance, relies less on debt and more on equity-based investments. This structural difference allows the VC market to maintain momentum, even in higher-rate environments. Without the burden of higher interest rates, VC investments are better positioned to keep moving forward in 2025.
Similarly, larger M&A deals that don’t require debt or leverage may also fare better. Buyers with strong balance sheets are still willing to make moves, especially when competition for deals is lower. In addition, the incoming administration is likely to create a more friendly and favorable environment for M&A activity that the previous administration may have stopped.
While optimism about market opportunities may persist in headlines, the landscape for private equity firms will remain challenging in the coming years. Tariffs, inflation, rising interest rates, and growing U.S. Treasury debt will create an environment where holding assets becomes more attractive than selling, pushing firms to navigate tighter liquidity and rethink traditional deal strategies.
PE firms that embrace smart, proactive strategies can not only weather the storm but also uncover new opportunities as conditions evolve. Optimism may be in the air, but success in PE will require something else: strategic adaptation and a clear-eyed view of the risks ahead.
Connect with the Risk Strategies Private Equity Practice at rscprivateequitysales@risk-strategies.com.