DC Advisory's Richard Madden on The PepTalks Webinar: 'Private Equity's appetite for investing in 2025'

Deal preparation

Buyers and sellers alike are aware of the importance of careful preparation before going to market. While this step is often discussed, what does actual preparation look like?   

This would be a more demanding level of preparation for a large-scale deal. We would expect a significant degree of financial preparedness alongside data cubes covering recurring revenue, customer base, key metrics, business KPIs, and a fully functioning forecast model. This suite of materials—including a sales plan and operations plan—would support the business plan in today's very diligent world for bidders.

The smaller the deal, the less scrutiny will be deployed – but there will still be a real degree of scrutiny. Bidders will expect future financial predictions to correlate with recent achievements. As such, we believe hockey stick business plans will be crossed out – unless they are very diligent and justified. Businesses should assume that the bidder universe is skeptical. So, having enough data and information to combat that skepticism will put the best foot forward for the business's exit.

Continuation and incentive in longer hold periods

For risk-averse business owners and vintage funds struggling to deploy capital, we believe that secondary funds continuation vehicles will become an attractive option to deploy capital behind the business instead of a different one. As this method then provides liquidity and enables a return of money to LPs, it is a way of killing at least two birds with one stone – the third being a better understanding of operational challenges than they would be in a new platform acquisition. As such, the Secondaries market will likely be very active this year.

We believe that continuation vehicles can benefit both parties as long as fair value and incentives are put in place for management rather than being pushed to another fund. It is important for management to recognize that an exit for the firm is an exit event for them, too.

Another important point discussed was the erosion of management incentives due to more extended hold periods.

The average holding period for private equity-backed portfolio companies has reached 5.7 years – up from 4.7 years in 2020[1]. One consequence of this is the erosion of management incentives in longer holds and how private equity will manage this. There is a real issue behind referring to the transfer of value from the management team to the private equity firm solely as the passage of time. The GPs, therefore, must ensure that management teams remain incentivized. The attraction of private equity for management teams, by and large, is due to the higher upper limit of profit compared to the public markets. The meaningful scale and lesser scrutiny make private equity such an appealing option for exits. Therefore, if that is no longer the case, private equity may not be able to attract the best management.

What good looks like (fundraising and deals)

We often discuss what private equity finds attractive and how businesses can stand out in competitive processes to get the best deal done. What, however, is attractive in terms of LPs and GPs? For management teams?

For LPs, they will find private equity a less attractive proposition. While private equity attracts very capable and talented people due to its historically fabulous returns, the cycle is long. For some, it can be a long time of sub-par pay until the carry-check arrives. This can be the same for both capital and talent, waiting a long time for an outsized return that may or may not come.

For GPs, their past returns determine their attractiveness. However, they are under much more pressure to have a more keenly defined view of their investment strategies. So, generalist GPs without a distinctive proposition are not at the top of LPs' list when determining where to put their capital.

For private equity, attractiveness is determined by the business itself or the market in which it operates. We have the market on one end – are there good growth opportunities in this market? At the other end is the business model - is there strong visibility, good margins, recurring revenue, and cash flow that could support a debt package? And, of course, within the business, the management team – is there a good team in place? Private equity is finding turnaround situations more and more appealing, where the business needs work, but the market itself is active and attractive.

To summarise, we believe the market for attractiveness – for exceptional assets – is much more competitive than it has been for the last decade.

Outlook for trade and strategic transactions

We have found that trade has been much more active and involved in recent years – becoming essentially a good banker bidder. However, this has not been reflected in recent stats, which suggest a YoY decline in global trade buyer volumes[2]. We believe that this is because the exciting trade buyers are, in fact, backed by private equity. Identifying, therefore, not just strategic trade buyers but also private equity-backed trade. They have been active acquirers, as private equity invests more money backing existing platforms than new ones.

As such, irrespective of whether trade is backed by private equity, founders, or they’re public companies - the better bidder is one who has the best product fit, geographic extension, strategic relevance, and synergies.

Summary

Looking back at our 2024 predictions, we were reasonably accurate! We did, however, believe that the recovery seen in Q4 would have started earlier in Q3. Considering this, with global deal volumes declining by 29%[3] over the past two years – save a slight recovery in Q4 2024 – we believe activity will rebound by year-end.

We believe the inevitable requirement to dispose of businesses for private equity will mean a much more active M&A market toward the back end of the year. This activity will be driven, therefore, in part, by GPs' need to return capital to LPs. So, potentially an influx of businesses for sale coming to market, but will there be an influx of buyers? In our view, there will indeed be many buyers – but at a price. Buyers who may have been burnt over the last few years will be prepared to pay top dollar for a great business – but less inclined for a good business. This may lead to a short-term misalignment in timing and quantity of businesses going up for sale and enthusiastic bidders. However, we believe that a new normal and equilibrium will emerge in a year from now, maybe a little longer. When that arises, we should see a balance between the pressure to deploy capital and realize capital.

To discuss the themes explored in this webinar, get in touch with Richard Madden here >   

For important information about this webinar, read our full disclaimer > 

References

[1] https://www.gain.pro/investor-reports/the-state-of-european-private-equity-report-h1-2025 

[2] https://www.dcadvisory.com/news-deals-insights/insights/dc-advisory-s-global-m-a-outlook-2025-searching-for-equilibrium/

[3] https://www.dcadvisory.com/news-deals-insights/insights/dc-advisory-s-global-m-a-outlook-2025-searching-for-equilibrium/

What to read next

podcast

PepTalks Podcast with DC Advisory's Richard Madden: Private equity deals market update

August 8, 2024

Deal Announcement

DC Advisory advises the shareholders of Steer Automotive Group on its sale to Oakley Capital

January 17, 2024