The re-rating of public markets has proven to be a double-edged sword for equity investors in 2025. While rising multiples have contributed positively to returns, they also raise concerns about stretched valuations and worries of a potential “market bubble.” Our base case is that, globally, equities should remain supported by modest economic expansion and earnings growth, although markets appear fully valued, warranting a degree of caution. High valuations alone are not typically a catalyst for market corrections, but they can amplify volatility and the magnitude of any drawdown triggered by external factors. More importantly, elevated valuations tend to compress long-term expected returns.

Against this backdrop, private equity (PE) stands out as an alternative source of growth and alpha within a portfolio. As public market valuations rise, PE becomes increasingly attractive as a source of return enhancement.

A false start to 2025

Heading into 2025, expectations were high for a rebound in PE, especially after public equities outperformed private markets in 2023 and 2024, even though PE has outperformed public equities in the longer term (Exhibit 1). However, persistent challenges—including elevated debt costs, constrained access to financing, and concerns over the earnings outlook—tempered exit activity in the public markets. The incoming U.S. administration was initially viewed as business-friendly, and the Federal Reserve’s (Fed’s) 100 basis points (bps) of rate cuts in the second half of 2024 added to the modestly positive economic outlook.

Yet, policy announcements on trade, immigration, and fiscal matters in the second quarter of this year introduced an “uncertainty tax” so high that it effectively closed the primary exit market for PE funds. PE funds held portfolio companies longer than usual, and the increased use of continuation funds sparked debate about the sustainability of the private equity model. 

Lower rates create a second chance

Since April, market conditions have improved markedly. The S&P 500 has reached multiple new all-time highs, recession risks have receded, and financial conditions have eased as the market prices in a deeper rate-cutting cycle. Our view is that the Fed will likely lower the cash rate by another 100 bps through 2026.

Improving market conditions, along with expectations of lower interest rates, have started to reinvigorate PE exit activity, with exits via M&A and IPOs accelerating. Public market exits in the first half of 2025 have nearly doubled the total for the previous year, reaching USD 83.4billion. Meanwhile, M&A activity over the same period has totaled USD 2.0trillion, ahead of the same period for 2024.

The Fed’s renewed rate-cutting cycle has fueled optimism for increased deal flows, given private equity’s reliance on leverage. Lower rates reduce the cost of debt, enabling greater use of leverage in new deals, but also facilitate the refinancing of existing debt, which can enhance the value and earnings potential of portfolio companies.

The cash rate is only one component of funding costs. Private equity increasingly sources capital from private credit markets, where lenders add a spread over the base rate. This spread has narrowed significantly as the private credit market has grown, and competition has intensified. Using the spread of direct lending over the Secured Overnight Financing Rate (SOFR) as a proxy, this spread has narrowed by 260 bps between the end of 2022 and July 2025. As such, there has been a commensurate rise in the debt multiple used in leveraged buyouts (LBOs) over the same period.

The combination of a lower base rate and tighter spreads is a favorable tailwind for M&A activity and LBOs. 

Big or small

Higher rates and limited access to debt have constrained activity at the larger end of the private equity market, while fueling growth in the secondary market. Distributions have fallen to record lows, prompting both GPs and LPs to seek new sources of liquidity. This shift has become a permanent feature of the private equity landscape. Secondary market deal activity totaled USD 162billion last year and is on track to surpass that in 2025, with USD 103billion in deals already completed in the first half.

The small- to mid-market segment of the secondary market presents attractive opportunities. These deals typically involve limited or no leverage, reducing reliance on debt markets, and offer alternative exit strategies due to their size. As the secondary market matures, it has become a viable means for rebalancing positions and redistributing holdings across managers. Pricing remains favorable for buyers, while discounts for sellers have narrowed, which allows for greater levels of activity and growth in the secondary market.

The use of continuation funds can be presented as a negative feature of the PE market and a conflict of interest, as GPs are on both sides of the transaction. However, continuation funds also present an opportunity to attract new secondary investment into a portfolio of existing companies.

While attention may be focused on the resurgence of large and mega-cap deals amid rising M&A and IPO activity, the secondary market continues to offer compelling opportunities.

Investment implications

Rising valuations and increased concentration in public markets are growing concerns for investors. Private equity provides a means to mitigate these risks by expanding the opportunity set. Notably, there are approximately 18,000 private U.S. companies with revenues exceeding USD 100million, compared to just 3,000 publicly listed firms, meaning that over 85% of this universe is private. Further, the increase in the availability of private capital means companies can stay private for longer. The median age of companies at IPO has risen to 14 years and creates more value for investors before going public. 

This dynamic means that private equity investment is increasingly replacing the growth opportunities once found in public small caps and the role they may have fulfilled in a portfolio.

Lower rates and improved access to debt should support increased M&A activity and LBOs and have a positive impact over the entire private equity life cycle. However, we continue to emphasize the small- and mid-cap segment of the private equity secondary market as a source of growth, benefiting from discounted pricing, rising deal activity, and a wider range of exit opportunities. 

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