Wachtell Lipton: Private Equity—2024 Review and 2025 Outlook

After a two-year decline in private equity activity, 2024 witnessed a rebound in both private equity acquisitions and exits, though volumes were still well below pandemic-era levels.  Total announced global private equity deal volume increased 22%, from $1.3 trillion in 2023 to $1.7 trillion in 2024.  Many of the headwinds that private equity M&A faced over the prior two years—including elevated interest rates and tumultuous financial markets—abated or stabilized.  At the same time, several years of stalled exits have led to record long investment holding periods, with sponsors having an average holding period of five years in 2023-2024, compared to 4.2 years in 2021-2022.  Robust fundraising has also left sponsor dry powder levels near 2023’s historical peak. 

We expect that the combination of record-high amounts of deployable capital, sponsors seeking liquidity events, and improving market conditions will cause private equity dealmaking to increase in 2025.  Sponsors seem increasingly willing to transact at current market valuations, and the robust credit and equity capital markets should facilitate activity.

Notable themes from private equity M&A in 2024, as well as important developments for dealmakers to bear in mind for 2025, are summarized below:

• Finding Opportunities in Credit Markets to Create Value.  Increased competition in the direct lending market, combined with a slow return in bank underwriting spurred by lowering interest rates, has provided private equity sponsors with an open credit market.  Private equity sponsors took advantage of this market opportunistically, employing varying kinds of structured and other hybrid financing solutions.  They also took advantage of structural shifts in the credit markets to partner with direct lenders or banks and serve as a source, rather than a customer, of debt capital. 
• Reemergence of Multi-Sponsor Deals and Growth of Sponsors Throughout the Capital Stack.  2024 saw notable examples of transactions with multiple sponsors working together, such as TowerBrook Capital Partners’ and Clayton Dubilier & Rice’s $8.9 billion take-private of R1 RCM.  As private equity firms have expanded their equity and credit offerings, multi-sponsor deals have moved beyond splitting the common equity check.  Private equity firms have teamed up throughout the capital stack, including through convertible or debt-like preferred shares and direct lending.  Sponsors have also employed partial exits that involve sales of minority stakes, or majority stakes with retention, to other sponsors.  As this trend continues into 2025, it is critical that careful attention be paid to overlapping and interconnected governance and exit rights, especially when interests may diverge.
• The Need for—and Expected Arrival of—Exit Opportunities.  Private equity exits increased in 2024 to $902 billion compared to $754 billion in 2023, although still well below pandemic-era highs.  As more and larger funds approach the end of their life, financial sponsors face increasing pressure to return money to their limited partners.  Traditional exits such as IPOs slowed over the past few years, and sponsors increasingly utilized alternative exits such as sponsor-to-sponsor sales, minority investments and continuation funds, as well as other liquidity events like leveraged dividends.  Certain investments, like those in infrastructure, have grown significantly in the past decade and often have scale and regulatory complexity that make exit difficult.  However, as we discussed in our recent memo, Mergers and Acquisitions—What Awaits in 2025?, we expect the public and private M&A markets to open up further in 2025 and a nascent rebound in the IPO market to continue.  Indeed, some large sponsors have publicly commented that they intend to access the IPO market for large portfolio companies starting in 2025.  In many situations it may be prudent for sponsors to maintain optionality and pursue a multi-track exit path towards an IPO, sale, dividend recapitalization and other monetization strategies.
• Use of MFW Cleansing Framework in Conflicted Take-Private Transactions No Longer a “No Brainer.”  Since the Delaware Supreme Court’s seminal 2014 opinion in Kahn v. M&F Worldwide Corp., private equity sponsors engaging in conflicted take-private transactions have been able to avoid an onerous “entire fairness” judicial review, and instead have received business judgment rule treatment, by conditioning the transaction on approval of both a special committee of independent directors and a fully informed majority of disinterested stockholders.  However, certain developments in Delaware caselaw in 2024 may make it more difficult and unreliable to comply with the MFW framework.  Among other cases, the Delaware Supreme Court made clear in In re Match Group that all members of a special committee (not just a majority) must be independent, and it found in Inovalon that disclosure by a target financial advisor regarding its potential conflicts of interest was insufficient and therefore invalidated the cleansing effect of a majority-of-minority stockholder vote.  While some sponsors continue to try to meet the enhanced MFW standard, other sponsors may decide to forego the approval of minority stockholders and instead assume some degree of litigation risk inherent in the entire fairness standard and focus on building a robust special committee process, in order to shift the burden to the plaintiff.
• Continued Regulatory Uncertainty—But Potentially Less Focus on Private Equity.  As we have discussed over the last three years, private equity and its acquisition tactics were a key focus for U.S. antitrust agencies during the Biden administration.  For example, the FTC brought its first lawsuit based on a serial-acquirer theory against a private equity firm, and the DOJ targeted private equity sponsors using Section 8 of the Clayton Act—which prohibits officers and directors from simultaneously serving with competing companies—by focusing on whether the firm (as opposed to an individual) had overlapping competitive board interlocks.  Earlier this week, the DOJ brought suit against a leading private equity firm alleging violations of the Hart-Scott-Rodino Antitrust Improvements Act in connection with the production of documents during HSR reviews.  This lawsuit is unprecedented in its breadth and with respect to the penalties sought. 
  
  The Trump administration is generally expected to be more amenable towards mergers and acquisitions, although it is unclear how any hostility towards “Big Tech” may impact dealmaking in that industry.  It remains to be seen what approach a new, more merger-friendly administration will take with respect to the recent changes to the reporting obligations under the HSR Act, but in the meantime, private equity sponsors will need to be mindful of the expanded disclosure requirements and increased time and cost associated with the new HSR rules.

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Private equity heads into 2025 with a degree of optimism, as both macroeconomic and regulatory conditions are expected to generally be more favorable for dealmaking.  At the same time, financial sponsors will need to navigate increasing pressures to consummate deals due to long holding periods and elevated levels of untapped dry powder.  We expect 2025 to be a busy year for private equity dealmaking, with opportunities for sponsors to reap rewards from being nimble and creative in executing thoughtfully structured deals.