This Q&A was published as part of PitchBook 2024 Annual US PE Breakdown sponsored by Stout.

What were the biggest surprises within the PE universe in 2024? Which occurrences or trends did not materialize that were generally expected, and why?

Rudi: The PE market in 2024 continued to be quite challenging, which was unexpected. Many anticipated that the downturn we saw in 2023, following the peaks of 2021 and 2022, would be mitigated by declining interest rates, sparking market activity. However, this did not materialize as anticipated. While deals still occurred, they were primarily smaller bolt-on acquisitions rather than larger platform deals.

Additionally, there was a noticeable shift toward optimizing existing portfolio companies. Firms are increasingly looking to deepen integration between their acquisitions, implement process improvements, and drive efficiencies to better position these companies for the market. We have seen growing requests for enterprise resource planning (ERP) implementation plans and performance improvement projects.

Historically, there was less interest in the middle market to drive for deeper integration, but the longer hold periods have made this more attractive.

Which regulatory trends at government agencies and Congress are you watching most closely, and how do you think the industry can adapt? Which are lesser known and should be more widely followed?

Rudi: I am watching the Biden administration’s strong focus on enforcing antitrust regulations, particularly concerning large transactions. While this primarily impacts significant deals, it also has ripple effects on the broader market, including smaller transactions. The industry is hopeful that this stringent enforcement will be dialed back, potentially substantially, as new appointments are made to positions like the Federal Trade Commission.

While the current enforcement might not directly prevent deals, especially smaller or midsized ones, it does add friction, creating concerns about potentially lengthy processes like the Hart-Scott-Rodino review. This has been a limiting factor on M&A volume. The hope is that lighter enforcement or increased flexibility could contribute to growth in M&A activity next year.

Bartley: The potential for tariffs under the upcoming Trump administration has prompted deal professionals and operating partners to consider necessary contingency plans and seek external advice on cross-border trade issues. Tariffs could have significant downstream effects on inventory management and long-term warehousing needs. Companies are becoming more strategic in planning for these scenarios, reflecting a need to adapt to potential geopolitical shifts.

Key themes in 2024 were ongoing value creation during longer hold periods, prolonged liquidity dry spells prompting creativity in areas like continuation funds or other secondary approaches, and evolving relationships with private credit as that latter asset class matured. How do you see those evolving in 2025?

Rudi: In 2024, we observed many deals either falling through or not being brought to market due to a gap in valuation expectations. Sellers often looked back to the high valuations of 2021 and 2022, while buyers were more cautious, having learned from past deals that did not perform as expected. This created a gap in both valuation and transaction process expectations. Even less promising firms were sold in the earlier period, which was not the case in 2023 and 2024.

Looking forward to 2025, there is hope that this valuation gap will close, with sellers becoming more realistic about current market values. Additionally, as inflation levels stabilize, there should be more clarity during due diligence, allowing for a better understanding of a company’s true profitability, free from the distortions of past inflationary pressures. This should help reduce challenges in the diligence process and potentially increase transaction volume as expectations between buyers and sellers align more closely.

Bartley: We are seeing an increase in creative strategies to provide liquidity to LPs, such as the use of continuation funds. With one of the largest transaction opinion practices in the US, we have noticed a significant uptick in this area.

Additionally, while large PE sponsors transformed into multistrategy asset managers many years ago, there has been a notable influx of mid and lower middle-market sponsors entering the private credit market, with existing managers expanding their platforms through both M&A and organic growth. Our portfolio valuation group is experiencing material growth, providing daily, monthly, and quarterly marks for private credit funds. In response, we have and are continuing to invest significantly in both talent and technology to meet these demands.

Which challenges did you work through with clients last year that were unexpected or novel relative to preceding years? How did those vary across the different types of services that you provide?

Rudi: Clients had an increased focus on in-depth analysis of their portfolio companies. With PE firms holding onto businesses for longer periods, there has been a growing interest in understanding profitability and performance improvement opportunities within their portfolio. This involves conducting more detailed analyses to identify which segments of a business are performing well and which are not. The aim is to pinpoint areas for improvement and potentially shift focus to more promising aspects of the business.

Previously, the strategy was often to acquire companies, apply financial engineering, complete bolt-on acquisitions, grow, and then sell. Now, with extended holding periods, there is a greater emphasis on understanding and optimizing the business. This includes consolidating back-office operations and other operational areas to extract additional value. However, with longer holding periods now more common, initiatives like ERP consolidation, finance integration, and operational improvement projects make more sense. These efforts align with the extended time frames and provide opportunities to demonstrate tangible results before exiting.