Private equity

February 2025  |  WORLDWATCH | PRIVATE EQUITY

Financier Worldwide Magazine

February 2025 Issue

The private equity (PE) industry is undergoing a transformative shift, driven by key trends such as integrating ESG considerations into investment strategies and portfolio company operations, as well as using artificial intelligence and big data analytics to identify opportunities, assess risks and optimise performance. Concurrently, the industry is facing several challenges, including fluctuating interest rates, geopolitical uncertainty and increasing competition for deals – challenges likely to continue to impact PE firms in the near term.

FW: What do you consider to be among the key trends shaping the private equity (PE) industry? For example, what are the major risks and challenges facing fund managers in the current market?

UNITED KINGDOM

Howard: The private equity (PE) industry is undergoing a transformative shift, driven by several key trends. One of the most prominent trends is the increasing focus on environmental, social and governance (ESG) factors. PE firms are increasingly integrating ESG considerations into their investment strategies and portfolio company operations. This is driven by both investor demand and a growing recognition of the long-term risks and opportunities associated with ESG factors. Another key trend is the rise of technology-enabled investing. PE firms are increasingly using technology to improve their investment processes, from deal sourcing and due diligence to portfolio monitoring and value creation. This includes the use of artificial intelligence (AI) and big data analytics to identify investment opportunities, assess risks and optimise portfolio performance. The PE industry is also facing several challenges, including stubbornly high interest rates, geopolitical uncertainty and increasing competition for deals. These challenges are likely to continue to impact the industry in the near term.

JERSEY

Felton: Current global trends include increased deal activity and exits in response to a lower interest rate environment and a convergence in price expectations. Political developments in the US may lead to the opening of additional pools of liquidity in response to industry lobbying to access retail investors’ pension funds, with anticipation of a buoyant US equities market providing opportunities to exit trophy assets. European markets saw a significant decline in activity in 2024 but expectations are positive for 2025 seeing an increase in investment activities. The uncertain economic picture in the UK and the developing impact of the most recent budget on business may create opportunities to acquire assets with potential for significant operational improvements and the need for expertise and capital to deliver those. The expansion of private credit and alternative strategies looks set to continue into 2025, as does the pressure from limited partners (LPs) to deploy capital which, along with a more supportive interest rate environment, is expected to lead to an increase in activity. Geopolitical risk remains a significant factor going into 2025 with a mix of conflict zones, international tensions and potential changes in the approach of the US to foreign trade all having the potential to significantly impact markets. However, firms are increasingly well placed to anticipate and adapt to the changing circumstances these present.

CAYMAN ISLANDS

Harris: The two key trends impacting the PE industry are the impact of new technologies and the innovative way managers are increasing liquidity. Many PE managers are embracing evolving technologies, especially AI, in discrete business areas, most notably in enhancing their due diligence process with faster and more accurate analysis of potential investments. The challenge for most PE managers is developing a clear AI strategy across the whole of their business. Some PE managers are ahead of the curve and are using AI to improve operational efficiency, portfolio management, deal sourcing and investor relations. The challenge for the majority is leveraging these opportunities without exposing the firm to the related risks. Over the past year, PE managers have demonstrated agility in challenging markets by employing innovative liquidity-enhancing strategies. These include continuation funds, net asset value loans, secondary market transactions and innovative fund structures. These approaches have enabled PE firms to maintain liquidity while optimising portfolio performance.

HONG KONG

So: We see several key trends that present a mixed picture for PE investing in Asia. In the current market, geopolitical and regulatory challenges are important factors that can have a substantial impact on industry and business performance. At the same time, we see fund managers looking for potential value-creating opportunities that arise from such challenges. In addition, aside from macroeconomic risks such as interest rates and inflation, which are showing some signs of improvement or at least stabilisation, traditional PE firms face competition from alternative financing providers such as private credit. On the positive side, the recent trend of improving asset valuations may present a more favourable dealmaking environment for PE investments and exits.

UNITED STATES

Dambre: Innovative liquidity solutions and alternative investment structures, such as secondaries and co-investments, sector specialisation, technology and AI-driven efficiencies applied to due diligence and portfolio management, and an increased focus on compliance and ESG, have been shaping PE in recent years. With the scarcity of appealing exit options and more expensive leverage in the past 18 to 24 months, sponsors have had to focus on operational value creation to replace financial engineering as a core driver of returns. Fund managers are also facing significant challenges, including macroeconomic uncertainty, regulatory scrutiny, inflated valuations and intensified competition for capital raising and deployment. Pressure from LPs for transparency and lower fees adds complexity in the current fundraising environment, as fund managers need to balance LP expectations with maintaining fund profitability. We expect these trends to continue shaping US PE activity, along with an uptick in traditional exits given expectations of lower interest rates, reduced taxes and a more friendly business environment under the new administration.

FW: In terms of deal activity, which sectors or industries do PE firms seem to be targeting? Are you seeing any common themes in the way PE firms are approaching, negotiating and structuring these transactions?

JERSEY

Felton: Globally, we continue to see significant activity in the manufacturing sector where opportunities to make significant operational improvements within targets remain. The software industry has also been a main focus, along with high-growth potential technology companies. Interest in the insurance sector remains strong. In UK markets, financial services and wealth management have continued to be favoured, including consolidation transactions and investments in new platforms. The regulated financial services sector in Jersey continues to see strong interest from PE investors with transactions at all levels of the market and significant potential for further consolidation in the market in 2025 in response to the increasingly global nature of the industry and the significant capital required to operate on this scale. At the mid-market level, a number of transactions in the past 12 months and the emergence of challenger firms in this space suggests that activity should continue in this space as well.

CAYMAN ISLANDS

Harris: PE firms are focusing on sectors where managers see opportunities for operational improvements, consolidation and where potentially disruptive and innovative technologies can create wealth. A particular focus on funds from the Cayman Islands has been AI, business services, cyber security and healthcare and life sciences. The other trend of note is the increase in the number of GP stakes funds. The added benefits that GP stakes funds provide, including diversified revenue for investors, alignment of interests and strategic partnerships, mean this trend is likely to continue throughout 2025. In terms of deal structuring, we are seeing an increasing number of deals incorporating ESG factors into deal structures, particularly in deals coming out of Europe. In the US, with the return of syndicated bank loans, there has been an increase in the complexity of some financing arrangements, particularly on larger deals.

HONG KONG

So: We continue to see our clients engage in a wide variety of sectors and industries, including technology, consumer, healthcare, business services and infrastructure. In approaching, negotiating and structuring transactions involving global businesses, one common theme we observe is a focus on assessing and navigating regulatory risks, which often involve a multijurisdictional analysis from a legal perspective as well as from a geopolitical perspective. On the M&A exit side, a slower market generally has led some PE sellers to take on more risk and move away from solely no-recourse exits, which they were able to demand in more robust markets.

UNITED STATES

Dambre: Sponsors continue to target resilient and high-growth sectors such as technology, including software as a service, FinTech, cyber security, cloud computing, healthcare and life sciences, professional services, energy transition and infrastructure. Notably, the AI boom is attracting massive investments in digital infrastructure and associated energy assets. These sectors align with macro-trends like digital transformation, and LP mandates. Regardless of sectors, a tougher dealmaking environment has led sponsors to think creatively about deal terms and structures to secure attractive assets, such as earnouts to bridge valuation gaps, minority investments or co-investments to share risk while providing additional capital for larger deals, rollovers, strategic partnerships and roll-up strategies, which are very much on the radar of the antitrust regulators, to scale fragmented industries. As the maturity wall approaches for funds that have entered the harvesting stage of their lifecycle, we expect increased deal volume and sustained levels of continuation vehicle transactions.

UNITED KINGDOM

Howard: PE firms are actively targeting sectors with strong growth potential and resilience, such as technology, healthcare and industrials. Within technology, areas like software, cyber security and AI are particularly attractive. In healthcare, PE firms are focusing on sectors like pharmaceuticals, biotechnology and healthcare services, particularly those focused on addressing challenges of ageing populations and coronavirus (COVID-19)-related backlogs. In industrials, renewable energy, manufacturing and infrastructure underpinned by the energy transition are the key areas of interest. Deals are being approached with a focus on operational improvement and value creation. They are conducting thorough due diligence to identify areas for enhancement. Negotiations are often characterised by a focus on long term value creation and alignment of interests between the PE firm and the target company’s management team. Deal structures are increasingly incorporating elements of ESG and sustainability, reflecting the growing importance of these factors to investors and stakeholders.

FW: What methods are PE firms using to build value across their portfolios and improve returns on exit?

CAYMAN ISLANDS

Harris: In recent years, PE managers have significantly expanded their strategies for enhancing the value of portfolio companies. The era of relying solely on financial engineering is fading. Instead, PE managers are adopting a more holistic approach to transformation. Managers are performing a full digital revolution of portfolio companies to create value. Utilising AI-powered systems and cloud technology to streamline operations, along with real-time dashboards for instant performance insights, are all part of this modernisation effort. PE managers have traditionally prioritised managing costs, boosting efficiency and achieving organic growth. Increasingly, they are not only focusing on organic growth but also pursuing strategic acquisitions or finding innovative ways for portfolio companies to leverage each other’s strengths for more aggressive growth.

UNITED KINGDOM

Howard: PE firms are increasingly diversifying their value creation strategies beyond traditional financial engineering. Portfolio bolt-on acquisitions have emerged as a key driver, offering opportunities for multiple arbitrage, cost synergies and revenue growth with relatively low risk. These acquisitions involve acquiring smaller, complementary businesses to enhance the core operations and market position of existing portfolio companies. Concurrently, performance improvement initiatives are gaining significant traction. These initiatives leverage data analytics to identify and address operational inefficiencies within portfolio companies. By optimising processes, enhancing operational efficiency and driving revenue growth, PE firms can significantly enhance the value of their investments. Dedicated portfolio teams play a critical role in overseeing these value creation efforts. These teams possess deep industry expertise and actively monitor portfolio company performance. They identify and evaluate potential acquisition targets, guide the implementation of performance improvement initiatives, and facilitate knowledge sharing across the portfolio to maximise returns for investors.

HONG KONG

So: We see PE firms partnering and collaborating with strategic investors, who can provide industry insight and relationships to assist in the growth of their portfolio companies. PE firms often also see this as a way of paving the way for a possible exit to sell a portfolio company to the strategic investor. Many PE firms are also seeking to build value across their portfolios by taking a more hands-on operating role with their portfolio companies in building out new businesses and managing efficiencies, focusing on bolt-on acquisitions and other M&A to build scale, as well as investing in greenfield or small and mid-market opportunities where they see a higher potential for outperformance and value creation.

UNITED STATES

Dambre: Traditional approaches to building value include driving operational improvements by streamlining costs, improving supply chain efficiency and enhancing profitable revenue growth. This strategy typically relies on recruiting or retaining top-notch leadership teams and highly experienced operating partners that will drive the business performance. Strategic add-on acquisitions are another avenue used to scale operations, gain market share and create synergies. In addition, new technology and AI can be leveraged to modernise operations and automate processes, and advanced analytics and data-driven decision-making tools are increasingly used at the portfolio level to help identify inefficiencies and guide strategic actions. Sponsors that manage to capitalise on these opportunities early on can accelerate their returns even further, for instance by doing leveraged recapitalisations to take advantage of strong free cash flow generation.

JERSEY

Felton: A combination of operational, strategic and financial initiatives continue to be deployed with the nature of the industry meaning there is no universal strategy. Most of these initiatives – operational improvements, revenue growth and strategic positioning – happen below the level of the fund itself or holding structures which are typically positioned in Jersey. However, Jersey is increasingly used to structure vehicles which are deployed as part of talent management strategies by creating management incentivisation platforms. Typically structured as corporate vehicles and taking advantage of the flexible company law regime in Jersey, these platforms are an important part of the toolkit in aligning management interests and securing operational improvements. Managing ESG issues in response to increasing investor and regulatory focus in relation to these important areas has also become increasingly important, with an increased focus on reporting and standards in this area.

FW: What legal and regulatory issues are shaping the PE industry at present? In your opinion, how will compliance obligations impact this asset class in the years ahead?

HONG KONG

So: US outbound investment rules, as well as Department of Justice sensitive data rules and recent Securities and Exchange Commission (SEC) rulemaking, are having a significant impact on cross-border investment activities by US funds and funds with significant US LP base. These rules will also increase due diligence burdens on PE funds to properly assess the legal and regulatory issues when evaluating potential investments. On the exit side, antitrust and national security scrutiny in the US and other countries continue to impact potential M&A by PE sellers. Meanwhile, regulatory and ESG developments and data security and cyber security concerns have increased the PE industry’s ongoing compliance, reporting and monitoring obligations.

UNITED STATES

Dambre: Although the sentiment may change under the new administration, the PE industry has recently faced increasing regulatory scrutiny in the US, notably on antitrust, transparency, tax, compliance and ESG reporting. Even though the SEC’s Private Fund Adviser Rules were vacated in June 2024, there is a general trend toward an increased disclosure burden for fund managers, including at LPs’ request. Taxation policies, notably carried interest, have attracted political attention, although any major reform in that respect is unlikely given Republican control of Congress and the White House. Data privacy laws like the California Consumer Privacy Act, stricter anti-money laundering and know your customer protocols, and trade sanctions compliance add further complexity, especially in cross-border deals. These obligations impact sponsors by driving up operational and administrative costs, which may lead to further industry consolidation. Sponsors will also likely increase their focus on stable jurisdictions and sectors to mitigate compliance and ESG risks. Finally, we expect that deal review by antitrust regulators and the Committee on Foreign Investment in the United States will continue to be a point of friction, but less so with the new administration.

JERSEY

Felton: Increased ESG requirements and reporting obligations continue to have an impact and will increase in significance in response to a combination of investor demand and increased regulatory disclosure obligations. For example, the European Union’s Sustainable Finance Disclosure Regulation requires reporting in relation to both funds and portfolio companies. These requirements place increased requirements on service providers to funds in Jersey. Taxation reforms continue globally, most notably the global implementation of the Organisation for Economic Co-operation and Development’s (OECD’s) Pillar Two directive, which has been or is being implemented in a number of offshore jurisdictions including Jersey, through the adoption of the multinational corporate income tax (MCIT). The MCIT in Jersey applies the OECD Model Rules and only impacts multinational entities with a group revenue in excess of €750m. Importantly, the MCIT will not apply to ‘excluded entity’ funds but, in common with many other jurisdictions, is set to become an important part of the structuring of larger deals, in particular portfolio companies which meet the revenue threshold.

UNITED KINGDOM

Howard: The PE industry faces a complex and evolving legal and regulatory landscape. Several key challenges are emerging. First, growing pressure to incorporate ESG factors into investment decisions and portfolio company management. Second, increasingly stringent regulations governing data handling and cyber security, driven by the rise of remote work and cloud computing. Third, heightened regulatory focus on the potential anti-competitive effects of M&A. Fourth, evolving tax laws globally, including those related to carried interest and international taxation, which can significantly impact PE firm profitability. Lastly, increased scrutiny of excessive leverage and potential financial stability risks, particularly in leveraged buyouts. These compliance obligations will likely have a substantial short to medium term impact on the PE industry. Firms will need to invest in robust compliance frameworks, including dedicated teams, technology and training. They will also need to adapt their investment strategies and portfolio company management practices to navigate these evolving challenges.

CAYMAN ISLANDS

Harris: As we entered 2024, the SEC’s proposed private fund regulations were anticipated to be the most substantial regulatory changes for PE fund managers in decades. These regulations were expected to cost the PE industry billions. However, a significant development occurred in June 2024 when the Fifth Circuit Court vacated these rules. With a change in administration in the US and new leadership at the SEC, we are left waiting to see if any of the proposed changes will resurface in 2025. Globally, new beneficial ownership rules are a new reality for fund managers – for instance, the Cayman Islands has introduced new regulations regarding beneficial ownership, which include updated reporting requirements, expanded coverage of entities and penalties for non-compliance. However, there are alternative routes for compliance for funds registered under the Private or Mutual Funds Acts. These regulatory shifts reflect the growing attention governments and regulators are focusing on private funds, with global demands for greater transparency driving many of the new regulations. One can only expect this trend to continue in the coming years.

FW: How has PE fundraising fared in recent months? In what ways does the relationship between general partners (GPs) and limited partners (LPs) continue to evolve?

JERSEY

Felton: Globally, we understand that the market in the US has continued to be challenging. The European market overall has shown resilience – albeit with a modest decline in fundraising – and Asia has faced significant challenges in attracting capital. Funds in Jersey have a global exposure but the UK and Europe remain our primary markets and that is perhaps reflected in the increase in both funds and assets under management in 2024. Based on the most recently available data in the first half of 2024, the total net asset value of regulated funds increased by 4 percent annually, with alternative assets classes, including PE, accounting for 21 percent of that growth. As the interest rate outlook continues to improve and equity markets in key portfolio company jurisdictions provide increased liquidity allowing for exits and the deployment of significant dry powder, we would expect the fundraising environment to experience a significant upturn as investors seek to redeploy capital returned on exits.

UNITED KINGDOM

Howard: PE fundraising has seen a slight rebound in recent months but faces challenges. Funds raised $408bn in H1 2024, up from $374bn in H1 2023, but still below the $426bn raised in H1 2022. Fundraising timelines have also increased, reflecting a tougher exit environment and declining distributions to LPs. To counter this, general partners (GPs) that have had successful fundraisings have had to demonstrate strong distributions to paid-in capital metrics to LPs, a shift away from the more traditional internal rate of return metric. The relationship between GPs and LPs is evolving, with LPs demanding more transparency and accountability. This includes greater access to data, more detailed reporting, and clearer communication on fees and performance. LPs are also increasingly focused on ESG factors and impact investing, and are seeking GPs with strong track records in these areas.

CAYMAN ISLANDS

Harris: Since the record-breaking years of 2020-21, the PE industry has faced significant headwinds. Global economic uncertainties, including inflationary pressures and geopolitical tensions, have impacted investor confidence. LPs have become more selective, favouring established fund managers with strong track records. In late 2024 and early 2025, some PE managers began to see signs of recovery in fundraising efforts. There is cautious optimism for the rest of the year. Strong relationships with LPs are more critical than ever in a competitive fundraising environment. LPs now expect more, and certain trends are helping GPs to deliver in a number of ways. Co-investment opportunities, for example, offer LPs potentially enhanced returns, greater control, increased transparency and tailored fee structures. GPs are also increasingly offering flexible and aligned fee structures to attract and retain LPs. A notable trend is that fund expenses are directly allocated to LPs instead of charging a management fee. Additionally, GPs are integrating ESG frameworks into their investment decisions, enhancing ESG reporting to LPs and engaging in collaborative ESG initiatives between GPs and LPs. Lastly, there is increased scrutiny of GPs’ ability to generate alpha, along with more sophisticated analyses of alpha sources and their sustainability.

UNITED STATES

Dambre: Fundraising has faced challenges due to macroeconomic uncertainty, rising interest rates and market volatility, leading to longer fundraising cycles and heightened competition. Despite these headwinds, funds with strong track records and differentiated sector expertise continue to attract capital, particularly in growth sectors like technology, healthcare, energy and infrastructure. Assets under management are generally expected to continue to increase at a rapid pace, especially in light of a growing trend of consolidation in the industry. The relationship between GPs and LPs is evolving, with LPs demanding greater transparency on fund performance, fee structures and particular reporting focus such as ESG and compliance. Co-investments and customised mandates are increasingly popular, offering LPs more control and reduced fees. GPs are responding in a number of ways, including enhanced reporting, performance-linked fees and tailored investment opportunities. GPs are also diversifying their investor base beyond traditional LPs, such as pension funds, endowments and sovereign wealth funds, by targeting notably high-net-worth individuals and retail investors, which are going to constitute a substantial part of the investor base in the years to come.

HONG KONG

So: The generally tougher exit environment, particularly initial public offerings, has presented challenges to new PE fundraising, with slower fund deployment and LPs still waiting for returns on capital from investments which now have longer and longer holding periods before deploying new capital. This tightened funding environment has driven a flight to quality, with larger and more-established PE franchises being favoured. Leading PE firms have been leveraging this advantage to increase their fundraising activity among retail investors, in particular high-net-worth individuals.

Christy Howard is a partner at Accuracy. He acquired his deal advisory experience while working at PwC in London, before joining Accuracy in 2023. With more than 20 years of deal experience, he specialises in financial due diligence for M&A transactions and has experience of over 200 transactions for a wide range of private equity funds and corporates. He can be contacted on +44 (0)7764 661 594 or by email: christy.howard@accuracy.com.

Romain Dambre is an M&A and private equity partner in the New York office of A&O Shearman. He advises private equity firms, sovereign wealth funds, family offices and their portfolio companies, as well as public and private companies, on a variety of US and cross-border transactions. He has advised clients on numerous significant matters, totalling over $250bn in value, including acquisitions, leveraged buyouts, take-privates, divestitures, carve outs, joint ventures, equity financings and corporate restructurings. He can be contacted on +1 (212) 610 6308 or by email: romain.dambre@aoshearman.com.

Simon Felton is a partner in the Appleby LLP corporate team in Jersey. He is known for his experience in leading international teams working on complex and ground-breaking structures involving a variety of underlying assets including securities, infrastructure, real estate, investment funds and cryptoassets. His practice also extends to advising arrangers and SPVs in relation to the Jersey aspects of workouts of financial assets – including structured finance portfolios – and secured real estate lending. He can be contacted on +44 (0)1534 818 229 or by email: sfelton@applebyglobal.com.

Miranda So is the co-head of Davis Polk & Wardwell’s practice in Asia (excluding Japan) and leads the Asia M&A and private equity practice. She acts for global and Asian corporates and funds in their most complex, high-stakes transactional matters. She advises on cross-border M&A, buyouts, sales, foreign direct investments, pre-IPO financings, joint ventures, going-private transactions, PIPEs, special situations, restructurings, and securities and other general corporate matters. She can be contacted on +852 2533 3373 or by email: miranda.so@davispolk.com.

Mark Harris is an audit partner and head of private equity and venture capital at KPMG in the Cayman Islands. With 24 years of experience, he specialises in auditing private equity, venture capital, private credit and digital assets funds. His client base ranges from emerging managers to global multibillion-dollar fund groups. In his roles as the audit risk management partner and quality performance review partner for the Cayman Islands, Bahamas and the British Virgin Islands, his expertise in risk management and audit quality allows him to identify potential audit risks and develop strategies to mitigate them. He can be contacted on +1 (345) 938 4423 or by email: mtharris@kpmg.ky.

© Financier Worldwide

THE PANELLISTS

UNITED KINGDOM

Christy Howard

Accuracy

UNITED STATES

Romain Dambre

A&O Shearman

JERSEY

Simon Felton

Appleby (Jersey) LLP

HONG KONG

Miranda So

Davis Polk & Wardwell

CAYMAN ISLANDS

Mark Harris

KPMG Cayman Islands