In our previous analysis of investment versus exit ratios, we examined how macroeconomic conditions, government policies, and Federal Reserve actions have shaped trends over the past two decades. We identified three key phases that defined the trajectory of M&A activity:
- Stimulus and Growth (2003–2008) – Post-recession recovery fueled PE activity.
- Stimulus Recovery and Expansion (2009–2019) – A long period of growth with notable policy-driven spikes.
- Post-COVID Surge and Market Contraction (2020–2024) – A rapid increase in deals followed by a slowdown due to inflation and rising interest rates.
With 2024 now behind us, let's take a fresh look at the pace of investments vs. exits, analyzing short-term trends from the last two years against the historical picture.
Digging into the historical data
The chart below provides a long-term view of private equity platform acquisitions and exits over 25 years. A few key takeaways emerge:
- The pace of exits has reverted to the more steady-state levels seen between 2014 and 2019, suggesting that firms are actively capitalizing on existing investments.
- Platform investments, however, remain 25% lower than pre-COVID levels, signaling a more cautious approach to new deals.
- With the pace of new acquisitions remaining lower and the pace of exits reverting to prior levels, the net effect is a reduction in the growth of the “holding inventory” for the PE firms industry-wide.
Where Do Investments and Exits Stand Today?
As you can see in the chart, investments currently outpace exits by a 2:1 ratio, so PE industry inventory is still growing, but the pace has slowed from the 2022 – 2023 period where it was closer to 3:1. Several challenges kept private equity firms from deploying capital at the same pace as in previous years:
- Political Uncertainty – With elections creating policy uncertainty, many firms were waiting for clarity before committing to new deals.
- Higher Interest Rates – Compared to pre-COVID conditions, the cost of debt financing remains elevated, making leveraged buyouts more expensive.
- Lower Business Valuations – Valuations have adjusted downward, but not enough to trigger a strong rebound in deal activity.
- Seller Expectations Remain Inflated – Many business owners are holding onto unrealistic valuation expectations, leading to a gap between buyers and sellers.
We will continue monitoring the pace of PE investments and exits as a barometer of overall market sentiment in the private equity space.