Key Private Equity Valuation Trends for 2025
Key Private Equity Valuation Trends for 2025
Looking ahead to 2025, many of the macroeconomic factors that have put a downward pressure on deal activity could ease or reverse. Declining interest rates, a decrease in borrowing costs, and improvements in cashflows could lead to higher multiples.
What factors could impact PE valuations in 2025?
Valuation stability
Uncertainty around investment valuations has been a key reason for a drop in buy-out and exit activity in the PE market, leading to a greater gap between seller and buyer pricing expectations, particularly heightened during the recent period of high inflation and rising interest rates that led to tightening liquidity, risk aversion and higher capital costs. We are witnessing some signs of an uptick in the valuation of assets, representing a boost in certainty in the market.
Macroeconomic factors
Rising interest rates to tackle inflation have impacted deal activity and valuations in recent years. In 2025, interest rates are expected to normalise and there is an element of political stability for the next few years, which could boost confidence in the UK economy and lead to higher multiples.
Consolidation
We expect to see more consolidation in sectors like Healthcare, Technology, and Energy. PE firms will target sectors with growth potential and resilient revenue models. As such, valuations in these sectors could hold steady or increase - only time will tell.
Secondaries and continuation funds
Secondary buy-outs are becoming more prominent, with valuations potentially rising due to competition for high-quality assets. At the same time, the market has seen a record high number of continuation funds¹ which have become an established way for GPs to make distributions while retaining investments. These funds allow limited partners to release capital and GPs to extend the life of their investments, ensuring continued value creation. It is unsurprising secondaries and continuation funds are seen as credible exit routes for GPs given the significant decline in IPO activity. Founders, management teams, and co-investors who reinvest equity in PE fund buyouts should assess how these structures affect their participation in management incentive plans and the returns on their share classes. With secondaries and continuation funds becoming key exit options for private equity, there will likely be increased demand for independent, third-party valuations of these asset transfers.²
IPO
As alluded to previously, the UK has witnessed an all-time low when it comes to IPOs, with 2024 marking the lowest IPO activity for c.40 years. Whilst it has been reported that companies have been increasingly listing in the US for better valuations, a new listing regime could make the UK more attractive for IPOs. Shein, a global e-commerce platform specialising in fast fashion, is rumoured to be listing in 2025, alongside cross-border payments platform Ebury and credit score and report app, ClearScore.³ It is hopeful the prospective IPO for Shein will ease capital markets and encourage issuers waiting on the sidelines. The change in attractiveness of IPOs provides GPs with another viable exit option when looking to achieve maximum value on assets.
Fundraising
GPs are extending fundraising periods and using rolling closes due to the slow pace of fundraising and the need for flexibility in the market. They are also often dialling back on their fund size expectations.⁴ One consequence of the trend has been increasing pressure on PE fund targets, as longer timelines create more difficulty sourcing them and may impact final multiples.
Unspent Capital
On the other side of things, the volume of ‘dry powder’ in the UK remains large and is sitting unspent. As competition for quality targets remains high, it is possible it will drive up prices and the overall value placed on investments.
To find out more about these trends and to see how BDO can support you with navigating your valuation requirements, please do get in touch.
References:
1. https://www.jefferies.com/wp-content/uploads/sites/4/2024/07/Jefferies-Global-Secondary-Market-Review-July-2024.pdf
2. https://www.ey.com/en_uk/insights/private-equity/pulse
3. EMEA IPOs Gone Cold: UK Edition, Raj Saiya
4. https://www.privateequityinternational.com/a-muted-year-for-fundraising-story-of-the-year/