2025 Mid-Market Review

Private Equity:
H1 Review and H2 Outlook

The private equity industry has found itself stuck in a holding pattern through the first half of 2025, with an anticipated increase in exits and distributions yet to materialize.

Private equity managers entered 2025 with cautious optimism and hopeful that with inflation peaking and interest rates coming down, jammed up M&A and IPO markets would reopen and enable firms to secure exits and return cash to investors, which in turn would help to reenergize becalmed fundraising markets.

For the first quarter of 2025, the market looked set to deliver on this promise, with global private equity exit value coming in at $175.59 billion – almost triple the $65.4 billion of exit value recorded in Q1 2024 and strongest quarter for exit value since Q2 2022, according to law firm White & Case and Dealogic.

A significant overhaul of US tariff and trade policy announced early in Q2 2025, however, slowed early momentum with prospective exits and IPOs of private equity portfolio companies put on hold as vendors and buyers paused to assess the impact of a changing tariff backdrop on portfolio company earnings and asset valuations.

Final exit figures for Q2 2025 are still pending, but with Bain & Co analysis showing buyout deal value for April 2025 almost a quarter (24 percent) below the monthly average posted through Q1 2025, a drop off in deal flow following a promising start to the year is expected, with exit activity directly impacted. Bain & Co models forecasting declines in exit value and volume in Q2 2025.

Pressure builds to lock liquidity

A choppy first half of 2025 has left managers under increasing pressure to up distributions to LPs, who are waiting on cash to flow back from their private equity programs before making allocations to the next vintage of funds.

This has left private equity managers stuck in a fundraising limbo, with PEI figures for Q1 2025 showing fundraising posting the weakest first quarter since 2020 and some $21.7 billion down on Q1 2024 numbers.

Bain & Co analysis indicates there will be little respite for managers facing the fundraising market, with around $3 of manager demand for capital for every $1 dollar of LP allocation supply.

Through the M&A and IPO drought of the last 18-24 months, managers had been able to ease the pressure to make distributions somewhat by unlocking liquidity through alternative structures, with Bain & Co noting that the industry had secured some $410 billion through minority stake sales, dividend recapitalizations, secondaries continuation vehicles and net asset value (NAV) financings.

The stalled exit rally of 2025 suggests that GPs will have to continue leaning into these alternative exit channels to extract some liquidity from ageing portfolios (Pitchbook analysis shows the private equity hold periods are a decade highs), but there is intensifying demand from LPs that GPs start to realize cash proceeds through conventional means and stop relying on highly-structured solutions to improve distributed-to-paid-in ratios.

In a webinar poll of Institutional Limited Partners Association (ILPA) members, for example, more than 60 percent indicated a preference for mainstream exits over other options – even if this meant trading at discount to current portfolio valuations.

Shifting market dynamics

Looking ahead to the second half of 2025, the prolonged liquidity bottleneck that has hovered over the market through the first half of year will drive shifts investor tactics and strategies.

LPs, who have waited patiently for exit windows to reopen, could start taking a more proactive approach to expediting liquidity by trading directly in the secondaries markets in great volumes. In 2024 LP-led secondaries deal value climbed to US$87 billion, the highest total since 2016, according to Adams Street Partners’ 2025 Global Investor Survey.

This momentum has carried into 2025, with US university endowments, a cornerstone of the private equity investor base, deciding to sell portfolios in the secondaries market for the first time. According to Adams Street, 40 percent of LPs see selling portfolios in the secondaries market as a priority for 2025 – the highest level since the COVID period in 2020.

This trend could prompt a changed in GP behavior, with acute demand for liquidity pushing managers to bite the bullet and trade out of portfolio companies – even if they have to do so at a discount to NAV – in order to clear out older vintages and move on.

The distributions squeeze is also prompting a rethink of geographic and market segment exposure among investors.

From a geographic perspective, tariff disruption in the US has sparked a shift in LP sentiment when it comes to making allocations by geography, with a survey by fund adviser Capstone Partners finding that around a third of LPs anticipate reducing allocations to certain geographies on account of geopolitical and macro-economic uncertainty, with North America emerging as the region most affected.

The return of the mid-market

There are also signs of a rethink among LPs when it comes to the prevailing strategy of the last decade to consolidate GP relationships, write bigger cheques to fewer managers and skew portfolios to large private markets franchises running multi-asset investment strategies.

Slowing distributions and the challenging exit market for large assets, however, has put the mid-market firmly back on the investor radar, with LPs pivoting back to this segment of the private equity ecosystem. The New York State Teachers’ Retirement System, for example, is considering upping its target for small and medium buyout funds from 45 percent to 55 percent, while the California Public Employees’ Retirement System has upped its exposure to mid-market private equity from 28 percent of its budget allocation to 62 percent during the last 24 months, PEI reports.

Investors have acknowledged the mid-market’s ability to generate alpha across cycles, with Pinebridge research showing that mid-market buyout funds show less correlation to public equities than large cap funds, and are less volatile and more resilient in periods of macro-economic uncertainty.

Returns dispersion in the mid-market between top performers and the rest is wider than at the top end of the market, which heightens risk of adverse selection, but at point in the cycle where large cap managers are still working through a backlog of ageing portfolio company exits, the mid-market’s track record and distinctive attributes are shining through and expected to continue catching LP attention through the rest of 2025.