Looking at the first half of 2025 reveals a nuanced landscape for private equity (PE) and principal investors. Despite market volatility and geopolitical uncertainties, a healthy appetite for dealmaking endures, focusing on profitable businesses with strong fundamentals and compelling sector tailwinds.
However, dealmakers were increasingly selective in the first half. That reflects caution in a high-cost-of-capital environment. Sustained high interest rates and extended holding periods fundamentally reshape deal economics, according to a PwC midyear outlook. Amid these complexities, value creation is a primary challenge for sponsors. Furthermore, economic and geopolitical headwinds are expected to continue to impact private equity deals into the second half of the year.
High-Value Deals Continue to Drive Growth
A prominent trend in the first half of 2025 was the continued growth in global private equity and venture capital deal value, even as transaction volume has decreased.
Aggregate deal value climbed 18.7% to $386.42 billion between January and June. That’s up from $325.57 billion in the same 2024 period, according to S&P Global Market Intelligence data. This significant value increase occurred despite a 6% YoY decrease in the number of deals, totaling 6,188 transactions.
June alone saw deal value reach $55.62 billion (compared to $49.78 billion in June 2024) For the same time period, deal count declined from 1,089 to 1,017, according to S&P Global. This divergence highlights that growth is predominantly driven by larger transactions. Those tend to be less susceptible to market uncertainties such as tariffs.
PE firms are actively pursuing these larger deals to deploy some of the approximately $2.5 trillion in dry powder, according to S&P Global.
Evolving Challenge of Value Creation
The current environment presents a clear challenge: Increased holding periods and elevated interest rates have raised the bar for achieving target Internal Rates of Return (IRR), according to PwC. PwC illustrates that achieving a 20% IRR with a 7% interest rate and a seven-year holding period now requires 4.2% annual earnings growth. That’s more than double the 1.7% needed at 3% interest rates.
This means attractive investment outcomes now hinge more on operational performance and strategic transformation. That effectively requires funds to create twice the enterprise value to hit prior IRR targets, according to PwC.
Top Opportunities & Sector Focus
Despite challenges, compelling opportunities exist. The technology, media, and telecommunications sector led June’s deal activity, with 354 private equity-backed transactions, dominated by application software (181 deals), followed by systems software (39), and interactive media (26), according to S&P Global. This underscores the ongoing appeal of digital transformation and software.
Furthermore, leading U.S. PE funds are strategically expanding internationally, particularly into Europe. This is to diversify portfolios and mitigate vulnerabilities from domestic macroeconomic shifts and tariffs, according to a PwC 2025 midyear outlook.
AI: A Top Theme to Watch For
Perhaps the most transformative trend in private equity is the rapid advancement of generative AI. This innovation compels private market leaders to build new capabilities for value creation, according to McKinsey. Embedding AI within portfolio companies is a top priority to streamline operations, improve analytics, and build competitive advantages.
Large funds are increasingly deploying AI for operational efficiency. They’re even creating AI deployment blueprints replicable across portfolios, according to PwC.
As AI matures, it is expected to play an increasingly significant role in M&A. This global phenomenon sees principal investors, including sovereign wealth funds, committing substantial capital to AI’s energy infrastructure needs, often in collaboration with PE firms.
Conclusion for Advisors
For financial advisors, understanding these dynamics and key trends is paramount. The first half 2025 private equity market shows selective, strategic capital deployment. That was driven by the need to create tangible value in a higher cost of capital environment. Furthermore, the emphasis has shifted from purely financial leverage to operational excellence, strategic transformation, and the judicious integration of advanced technologies like AI.
Advisors can guide clients to recognize that firms capable of navigating economic uncertainties, optimizing performance, and leveraging technological innovation can generate sustainable returns and unlock enterprise value.
Originally published at Advisor Perspectives
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