Private Equity Trends 2025: What LPs Want (And Why GPs Should Care)

The 2025 private equity market shows striking contrasts. Limited partners remain committed to the market even though fundraising in any discipline has hit its lowest point since 2016. McKinsey's latest survey reveals that 30 percent of LPs aim to boost their private equity allocations in the next 12 months.

This contrast shapes today's private equity industry trends and creates a mix of hurdles and possibilities. Private capital markets signal recovery as buyout investment value jumps 37% year over year to $602 billion. Growth equity stands out as a success story with deal count and value climbing over 50% compared to last year. GPs now face mounting pressure to deliver results. The raised interest rates mean sponsors must generate 4.2% annual earnings growth to achieve a 20% IRR with a seven-year holding period - more than double the requirement during 3% interest rates.

This piece dives into LP's 2025 expectations, evolving fundraising realities, and GP strategies to excel in a competitive environment. We'll get into AI's influence on private equity investment approaches and highlight sectors drawing the most capital in this dynamic market.

What LPs want in 2025: A shift in mindset

Private equity markets are experiencing major changes as Limited Partners (LPs) change their expectations and priorities. Institutional investors have waited patiently for returns, and they now send clear signals that General Partners (GPs) can't afford to ignore.

Focus on liquidity and faster distributions

LPs care about one key metric more than anything else: Distributions to Paid-In capital (DPI). McKinsey's 2025 proprietary survey shows 2.5 times as many LPs ranked DPI as a "most critical" performance metric compared to three years ago. This focus on real returns marks a clear change from past years when paper gains and IRR projections were enough.

The exit backlog has reached critical levels. Private equity firms now hold over 30,000 assets they need to monetize, with 35% kept for more than six years. US and Western European funds raised in 2018 should show a distributed to paid-in capital ratio near 0.8x based on historical cash flows. The current ratio barely exceeds 0.6x.

LPs now reject partial liquidity solutions. A recent poll of Institutional Limited Partners Association webinar participants revealed that more than 60% wanted conventional exits over alternatives like dividend recapitalizations. They would accept lower valuations than recent marks if needed. This shows LPs' frustration with today's longer holding periods.

Increased appetite for co-investments

Co-investment interest remains strong despite liquidity concerns. Nearly 90% of LPs plan to allocate up to 20% of their capital to this strategy. The appeal makes sense - co-investments usually come without management or performance fees, which boosts net returns in this typically high-fee asset class.

Co-investments let GPs put more capital into attractive companies despite fund concentration limits. Many use this approach to broaden their portfolios and extend investment periods. This helps them stay away from the tough fundraising market longer.

The co-investment market has changed. Quality varies among potential co-investors in this crowded space. Some LPs have become cautious about the strategy's volatility. While it works well in strong markets, current conditions make some institutional investors slow down their co-investment activities.

Preference for separate strategies

Simple "buy low, sell high" approaches through financial engineering don't work anymore. LPs now favor managers who know how to create operational value. These investors steadily gain market share from pure capital allocators. Real estate shows this trend clearly - GPs with operational capabilities now manage 37% of assets, up about 11 percentage points in the last decade.

What attracts LP capital today? Survey respondents say managers need to show:

• Deep sector and subsector expertise (43%)
• Individual portfolio manager experience (38%)
• Advanced digital analytics and reporting (35%)
• Ability to execute large and complex deals (35%)

The lower end of the middle market leads in operational value creation strategies. These businesses often need operational improvements, digital transformation, and growth. The results speak for themselves - since 2013, top mid-market funds have beaten top large-cap funds by 719 basis points.

Private equity trends in 2025 show that LPs have become more sophisticated and selective. Fundraising takes longer and competition for capital keeps growing. GPs must adapt to these new priorities or risk losing the race for commitments.

The new fundraising reality for GPs

Private equity markets have seen radical changes in their fundraising landscape that created new challenges for general partners (GPs). The once simple process has become complex and needs sophisticated strategies and patience.

Longer fundraising cycles

Fundraising now takes much longer than before. GPs spend about 20 months on average to raise funds - almost twice the time it took before the pandemic. The numbers are even more striking as 38% of funds now take over two years to close, up from just 9% in 2019.

Market conditions explain these extended timelines. Fundraising across private asset classes dropped for the third straight year and ended 2024 at $1.10 trillion. This represents a 24% yearly decline and sits 40% below the 2021 peak of $1.80 trillion. The industry closed only 3,000 funds, a 28% drop that's roughly half the annual pace before the pandemic.

U.S. buyout fundraising took a big hit with a 20% decline in 2024 compared to 2023, while the number of funds fell by nearly 50%. The first half of 2025 saw just $27 billion raised across 238 funds. This marks a steep fall from the 2022 peak when firms raised $197 billion across 1,737 funds.

These longer timelines have pushed GPs to change their approach:

• They offer coinvestment opportunities to attract capital in competitive markets
• They build better fundraising capabilities and sales tactics
• They create new fund structures, including continuation vehicles, to meet liquidity needs
• They find capital from non-institutional investors through multiple channels

Capital consolidation among top performers

Large, established managers now attract most of the capital. Investors prefer putting their money into firms that have proven track records - a trend known as "flight-to-quality". European private equity's top five funds grabbed over half of all capital raised.

The top 10 funds worldwide collected 36% of all raised capital. In fact, experienced fund managers received 98% of capital, with 40% going to funds raising $5 billion or more. This pattern has stayed consistent since 2016 as investors prefer established managers who provide stability, broader strategies, and strong track records.

Mega funds raised $88 billion in early 2025 but made up only 6% of total funds. Notable examples include Thoma Bravo ($24 billion) and Blackstone ($20 billion). PitchBook data shows funds over $1 billion make up nearly 79% of all capital raised.

This split market lets established firms grow while smaller players struggle to raise enough capital. Many small firms must then choose between strategic buyouts, closing down, or moving into run-off mode.

Importance of sector specialization

Sector specialization helps firms stand out in this tough fundraising environment. Studies show sector specialists consistently beat generalists, with a median TVPI of 1.81x compared to generalists' 1.69x. Specialists outperform generalists by 1.0% relative to public markets.

Some studies show even bigger gaps. "Niche" PE funds achieved an average IRR of 38%, while mainstream PE funds reached only 18%. Healthcare and IT specialists performed exceptionally well thanks to strong industry momentum.

Modern competitive markets need deep sector knowledge, unlike early PE days when financial engineering drove returns. Specialists can use their industry expertise and networks to find deals, win competitions, and improve operations.

Sector-specialized funds have beaten multi-sector funds in almost every vintage year since 2003. GPs looking to stand out in today's crowded market find that real sector expertise helps attract selective limited partners effectively.

Creative liquidity solutions gaining traction

Private equity exits are at their slowest pace in years. GPs are learning new ways to create liquidity. These creative solutions are vital tools in the 2025 private equity landscape. They provide alternatives to traditional exit routes and address LP's need for distributions.

Continuation vehicles and secondaries

The secondary market has boomed over the last several years. It reached $165 billion in transaction volume in 2024—40% more than the previous year. This growth trend looks strong. Market projections show it will reach $300 billion by 2030, almost twice the current levels.

Continuation funds now dominate this expanding secondary market. They make up about 90% of GP-led secondary volume. These vehicles let PE firms move assets from older funds into new ones. This extends ownership beyond the typical 10-year lifecycle. LPs can choose to cash out, keep their investment, or do both.

Single-asset continuation funds (SACFs) have become the go-to structure. They represent 45% of GP-led volume. SACF volumes jumped 54% in 2024 with 73 completed transactions. Large multi-asset continuation funds also drove major volume growth.

Most capital in GP-led transactions went to middle-market and lower-middle-market deals. Investors' attention is drawn to these deals because of their potential returns, lower entry valuations, strong GP alignment, and multiple paths to liquidity.

NAV loans and dividend recaps

Net asset value (NAV) loans are now popular financing tools for private equity funds that need liquidity without selling assets. These secured credit arrangements utilize a fund's underlying portfolio assets instead of uncalled capital commitments.

NAV lending has grown because private equity funds don't deal very well with selling assets within planned holding periods. The core team finds these loans give them flexibility when they need more capital after allocating most LP funds.

These loans help achieve several goals:

• Support existing portfolio companies late in a fund's lifecycle
• Fund profitable acquisitions for well-performing companies
• Return distributions to LPs ahead of schedule
• Refinance existing debt obligations

Dividend recapitalizations have also seen rapid growth as another liquidity solution. Companies take on new debt to pay special dividends to private investors. This lets PE firms recover some or all of their original investment while keeping their stake.

Both approaches offer quick cash benefits but need careful thought. NAV loans create systemic risk through cross-collateralization across portfolio companies. Dividend recaps can burden companies' balance sheets with more debt.

Sponsor-to-sponsor deals

Secondary buyouts remain a key liquidity channel in today's market. These "sponsor-to-sponsor" deals usually involve larger buyers with more resources buying companies from smaller sellers.

Sellers like these deals because they close faster than other exit options. Buyers must see clear opportunities to create value beyond what the previous sponsor did.

Financial buyers can't pay huge premiums like strategic buyers because they lack synergies. Research shows secondary buyouts often produce lower fund returns.

Success in these deals depends on having a different approach. PE firms use the same value drivers—debt repayment, operational improvements, and multiple expansion. But their methods vary. Some firms focus on new products and market growth while others prefer buying more companies and industry consolidation.

These creative liquidity solutions show how private equity adapts to tough markets. Traditional exits remain limited, so these alternative approaches will likely become more common throughout 2025.

Private credit’s growing role in private capital markets

Private credit stands out as the top performer in private capital markets. It draws unprecedented attention from institutional investors. Traditional private equity faces challenges while this asset class continues its impressive rise and has altered the map of investment strategies.

Why LPs are allocating more to private debt

Limited partners have good reasons to increase their private debt allocations. Private debt assets under management have grown to $1.5 trillion globally - more than double since 2016. The market shows strong momentum and that indicates it will reach $2.3 trillion by 2027.

The yield advantage remains the biggest draw. Private debt funds have delivered 8-12% returns in recent years and outperformed many traditional fixed-income investments. These returns come with less volatility than equity investments, which creates an attractive risk-adjusted profile.

LPs value several key advantages:

• Portfolio diversification - Private debt offers low correlation to public markets
• Inflation protection - Floating rate structures adjust with rising rates
• Regular income streams - Quarterly distributions line up with pension liabilities
• Senior secured positions - Priority claims on assets provide downside protection

Institutional investors have adjusted their strategy. Pension funds now put 5-7% into private credit strategies, up from 2-3% five years ago. The trend looks set to continue as nearly 40% of investors want to increase their private debt allocations in 2025.

Direct lending vs syndicated loans

Direct lending has changed how private credit works. Unlike syndicated loans that banks arrange and distribute to multiple lenders, direct loans let private credit funds provide financing straight to borrowers—usually middle-market companies.

Direct lending works better than syndicated structures. Borrowers benefit from higher deal certainty because they work with one decision-maker instead of complex syndication processes. This relationship-focused approach also enables more customized financing solutions that match specific borrower needs.

Numbers tell the story. Direct lending funds raised $61 billion in 2024, while broadly syndicated loan funds only raised $25 billion. Direct lending now makes up about 70% of all private credit transactions.

Pricing has evolved too. Direct loans used to cost much more than syndicated alternatives, but competition has narrowed this gap. Today, direct loans cost 50-75 basis points more than similar syndicated deals—down from 150-200 basis points five years ago.

Opportunities in special situations and asset-backed finance

Smart investors are learning about specialized areas within private credit. Special situations strategies have caught attention because they focus on complex, distressed, or time-sensitive opportunities.

These strategies work well when markets struggle. Economic uncertainty continues through 2025, and special situations funds can take advantage of market disruptions. Distressed debt strategies raised $38 billion in 2024 - the highest since 2009.

Asset-backed finance grows rapidly too. These strategies secure financing against specific assets rather than overall corporate credit quality. The market has expanded into specialized lending for aircraft, real estate, intellectual property, and even litigation claims.

Returns explain why investors love these strategies. Specialty finance strategies generate average net IRRs of 12-15% and beat traditional direct lending by 300-400 basis points. The secured nature of these investments adds extra protection against losses.

Private equity and private credit will likely meet more closely in 2025. Investors want to balance their private capital across different levels of risk and return.

AI and digital transformation in private equity

AI is quickly becoming a game-changer in private equity markets. It changes how firms operate and create value. Digital capabilities have become essential components of competitive PE strategies as we move into the mid-2020s.

AI as a portfolio value driver

PE firms now use AI to improve portfolio company performance. By 2025, AI and data analytics will guide 75% of early-stage investor research. This shows a fundamental change in value creation methods.

PE firms already see real results. A Bain survey of private equity investors managing $3.20 trillion in assets showed that 20% of portfolio companies use generative AI with measurable outcomes. These companies mainly focus on:

• Revenue growth through dynamic pricing and customer acquisition
• Cost reduction through process automation and optimization
• Strategic growth through market expansion and digital business models

The effects can be significant. Apollo's portfolio company Cengage cut content production costs by 40% and saved 15-20% through automated lead generation. Shutterfly's AI auto-fill feature for photo books earned $5 million in new revenue during its first year.

Data science in fund operations

PE firms use data science to improve their core operations beyond portfolio companies. About 60% of PE operating partners say their portfolio companies use AI, though only 5% have scaled these projects into production.

Data science has changed deal sourcing. AI tools can find 195 relevant acquisition targets in the time an analyst needs to review just one. This expands the investment funnel and makes targeting more precise.

Advanced analytics have made due diligence more sophisticated. Natural language processing extracts data from unstructured documents like financial statements and subscription files, which saves manual work.

Portfolio monitoring has improved. Blackstone's Data Science team uses machine learning across their portfolio of 250+ companies with combined annual revenue over $225 billion. These tools help firms measure performance, spot struggling assets early, and time their exits better.

AI-native startups attracting capital

Investment interest in AI companies has grown. Global AI spending will more than double to $632 billion by 2028. This growth has brought in unprecedented capital.

AI startups raised over $100 billion globally in 2024. Nearly half of all new unicorns were AI companies. Companies focused on generative AI received $33.90 billion in private investment, 18% more than the previous year.

Funding for AI-native companies stays concentrated. Three hubs—Silicon Valley, Beijing, and Paris—received 80% of venture capital for AI-native startups between 2023 and 2024. Silicon Valley got 65% of the $47 billion raised.

This concentration shows how fast AI companies can scale. Unlike previous tech waves, AI startups reach revenue goals "faster and with much leaner teams". AI infrastructure startups raised $12.60 billion globally in 2024, compared to $5.10 billion in 2022.

PE firms must understand that digital transformation and AI adoption are crucial to stay competitive in 2025 and beyond.

Sector trends in private equity investment

Private equity markets show clear investment priorities in different sectors. Through 2025, some sectors pulled in more capital than others, which shows both ongoing trends and new chances for growth.

Tech and healthcare dominate

Technology remains the life-blood of private equity investments. It makes up 33% of buyout deals by value and 26% by volume. Tech and healthcare work together really well. KKR showed this by buying a 50% stake in healthcare analytics company Cotiviti from Veritas Capital for about $10 billion.

Healthcare technology investments shot up by 50% to $15.62 billion in 2024. This growth kept going strong into 2025. First-quarter healthcare technology deals hit $2.91 billion—22% more than the same time in 2024.

The healthcare sector's appeal comes in part from using artificial intelligence. AI promises to revolutionize diagnostics, personalize treatments, and predict disease trends. US and Canadian companies get the biggest share of this investment. They pulled in $10.53 billion across 397 deals in 2024. European companies followed with $3.62 billion across 154 deals.

Energy transition and infrastructure

We see more infrastructure investment now. This comes from digitalization, decarbonization, and energy security needs. Data centers stand out as one of the fastest-growing types of infrastructure assets. Investment hit $50 billion in 2024—way up from $11 billion in 2020. Growing AI and cloud computing needs drove this increase.

Clean energy transition gives private equity investors another big chance. McKinsey says changing the global economy from fossil fuels to clean energy needs about $9.2 trillion of investment each year through 2050. That's $3.5 trillion more per year than current levels.

The US, UK, and EU governments help this shift by creating clean energy strategies and backing private investment. These incentives make projects viable that didn't make financial sense before without heavy government support.

Decline in ESG enthusiasm

While tech and infrastructure investments grow, ESG-focused investing has pulled back. ESG investing peaked in 2023 before dropping sharply. Now, only 53% of private investors look at ESG factors when investing, down from 65% in 2021.

Cultural wars and energy security worries from global tensions caused this cooling. Investors doubt ESG claims more now—63% worry about greenwashing, up from 48% in 2021.

The recent US presidential election brought more political pressure around ESG. Many GPs and portfolio companies now think twice about publicly supporting sustainability. They might still work on ESG privately but stay quiet about it. This leads to "greenhushing"—keeping ESG achievements quiet. About 58% of corporations now talk less about their ESG work.

Geopolitical risks and LP decision-making

Geopolitical tensions have become key drivers of investment decisions in private equity markets during 2025. A recent survey shows these concerns now affect most LPs' investment choices. This creates both challenges and opportunities for fund managers who must navigate a more complex global environment.

US-China tensions and supply chain shifts

The relationship between US and China remains the main source of risk for businesses, which has changed the global business environment. Over two dozen private equity firms have decided to avoid China and Hong Kong as the U.S. government strengthens investment restrictions. Dealmakers now conduct deeper supply chain due diligence for portfolio companies, making this a standard practice.

Major disruptions have hit globalized supply chains as geopolitical boundaries change. Many companies now rethink their dependence on Far East suppliers. Sovereign investors have turned their attention to alternative markets throughout 2025. ASEAN countries have seen a surge in foreign direct investment as companies broaden their supply chains beyond China.

Tariff impacts on deal strategy

Private equity firms find themselves frozen while they wait for clear tariff policies. Their investment model needs stable cash flows, but weekly changes in trade policies make many reluctant to act. Deals take longer to close because of extended due diligence periods and stricter conditions.

PE professionals now model downside scenarios and test potential investments for trade risks. They work closely with trade and legal advisors to keep up with policy changes. Portfolio companies face their biggest challenge in stabilizing earnings while import tariffs drive up costs.

Policy changes under new administrations

The political landscape of 2025 continues to shape PE strategies. Trump's "Liberation Day" tariffs have pushed the industry back into uncertainty and stopped its recovery. PE investors watch the incoming administration's expected moves on regulations and tariffs.

The administration's latest investment policy speeds up the trend of including trade and technology policy in 'national security' definitions. This affects both inbound and outbound private equity investment significantly. Firms now add legal carve-outs in investment documents to reduce increased regulatory scrutiny and compliance burdens.

How GPs can stand out in a crowded market

Private capital markets today require more than financial expertise to stand out. General partners must reimagine their strategies to succeed in a selective environment.

Operational value creation over financial engineering

Financial engineering no longer generates competitive returns in private equity investment. Dealmakers and operators now focus on sustained operational transformation. This radical alteration requires teams to build internal capabilities that improve portfolio company performance instead of adjusting capital structures.

The best firms work among business founders and provide access to networks of successful executives who guide the value-creation process. These hands-on investors steadily capture market share through targeted operational improvements. They now account for 37% of real estate assets under management in 2023, an 11 percentage point increase in the last decade.

Building trust through transparency

Transparency has become a vital differentiator in GP-LP relationships. Limited partners just need detailed information about portfolio assets. They look beyond standardized quarterly reports and want immediate access to operational metrics.

Modern technology platforms help GPs automate data collection, standardize reporting processes, and deliver insights LPs expect. A well-laid-out transparency approach achieves three key objectives: uncertainty reduction, control demonstration, and deeper investor confidence.

Offering flexible fund structures

Traditional fund structures once dominated private equity markets. Innovative approaches like evergreen funds, medium-term closed-end vehicles, and continuation vehicles have gained popularity.

Flexible structures let GPs accommodate varying LP priorities while retaining operational flexibility. Firms that offer customized investment vehicles arranged with specific investor needs will secure capital more efficiently than those using traditional models through 2025.

Conclusion

Private equity markets face a turning point as we head into 2025. Limited partners just need more than theoretical returns - they want real distributions, specialized expertise, and genuine value creation. General partners now deal with extended fundraising cycles, fierce competition, and uncharted geopolitical waters.

The market still offers plenty of opportunities for adaptable firms. Creative liquidity solutions like continuation vehicles and secondaries have become great tools to generate returns in today's tough exit environment. Private credit keeps soaring, with attractive yield benefits and ways to spread risk across portfolios.

Technology remains the life-blood of investment targets, especially when you have healthcare in the mix. Infrastructure and energy transition investments show huge growth potential. AI has moved beyond buzzwords to become a key value driver that changes everything from deal sourcing to portfolio company operations.

Today's successful GPs must stand out through operational excellence rather than financial engineering. Those who build trust with transparency and flexible fund structures will secure capital faster than rivals stuck in old ways.

The private equity world keeps changing, but one fact stays true - survival depends on adaptability. Firms that welcome change, build specialized expertise, and line up with LP priorities will succeed despite market hurdles. The industry faces challenges, yet those who guide through them skillfully will find rich opportunities for growth and returns in this new reality.

FAQs

Q1. What are the key trends shaping private equity in 2025? The main trends include a focus on liquidity and faster distributions, increased appetite for co-investments, preference for differentiated strategies, longer fundraising cycles, and the growing importance of AI and digital transformation in value creation.

Q2. How are LPs' expectations changing in the private equity market? LPs are now prioritizing tangible returns (DPI) over paper gains, showing strong interest in co-investments, and favoring managers with deep sector expertise and operational value creation capabilities.

Q3. What creative liquidity solutions are gaining traction in private equity? Continuation vehicles, NAV loans, dividend recapitalizations, and sponsor-to-sponsor deals are becoming increasingly popular as alternative liquidity solutions in the current market environment.

Q4. Why is private credit attracting more attention from investors? Private credit offers attractive yields, portfolio diversification, inflation protection, and regular income streams. It has consistently delivered 8-12% returns in recent years, outperforming many traditional fixed-income investments.

Q5. How can GPs stand out in the crowded private equity market? GPs can differentiate themselves by focusing on operational value creation rather than financial engineering, building trust through increased transparency, and offering flexible fund structures that cater to varying LP preferences.