Ripple Effects: The ‘Profound’ Impact of Private Equity
Writer: Juan Tagle, Director, Palm Beach Capital
In today’s Private Equity landscape, caution rules against a backdrop of macro and geopolitical uncertainty that is keeping a good deal of money on the sidelines. While the outlook is brightening, the cautious environment is having a knock-on effect across the professional services sector.
Topping over $5 trillion globally in assets under management (AUM), Private Equity has become a major asset class, with the sector on pace to raise another $300 billion of new capital in 2025 alone. Yet, deal activity and momentum started the year off a little choppy, to say the least. Largely driven by tariff uncertainty, interest rate and inflation concerns, and an evolving political landscape, middle-market PE exit activity is seeing one of its slowest starts in a very long time. According to Pitchbook, 2Q25 exit deal count hit its lowest level in the last 12 months. While overall buyout activity remained relatively flat compared to last year, deal volume has largely been driven by add-on activity, which accounted for 75% of Q2 deal volumes.
As funds are raised each year and subsequently deployed, the impact that private equity has on other professional services industries can be profound. A sluggish start like we’ve seen this year will ultimately have ripple effects across the entire professional services community, as the ecosystem of advisers that surround a deal will all feel the effects of lower middle-market M&A volumes. Whether it’s investment bankers, attorneys, CPA’s, lenders, insurance brokers, or any other transaction adviser connected to a PE-backed deal, the lack of deal activity will create some angst around planning for adequate staffing levels and making new hiring decisions. As we saw in the robust deal-making environment of 2021, this could also create a much more competitive environment for advisers winning new business based on capacity, timing, and price of services. This could also be exacerbated by everyone trying to get a deal done before year end.
Optimism coming back
The good news is that moving toward the end of 2025, some optimism and sentiment around deal activity improving seems to be coming back. Driven by hopes of deregulation, tariff uncertainty normalizing, and a potential decrease in interest rates, deal-makers seem to see a path to getting back to the blocking and tackling of buying and selling businesses. The private credit markets continue to see record fundraising years, and single asset and multi-asset continuation vehicles are creating much needed liquidity for some investors. While the backlog of long-dated PE-owned assets continues to see record highs, hopefully, we are entering the early innings of a more normalized and robust middle market M&A deal environment with much smoother sailing ahead.
Ultimately, rising valuations and the appetite to transact will come as investors regain confidence in the ability to underwrite the projections and outlook of middle-market businesses. This coupled with stable debt and equity markets, a deceleration of interest rates, and continued moderating inflationary pressures will hopefully provide the backdrop for a much improved M&A environment that helps keep the entire deal community busy for the rest of 2025.
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