Private capital trends for 2025

Insight

17.01.2025

As we enter 2025, our private capital experts from across the firm explore the key trends that will shape the deployment of private capital in the coming year.

Join our free webinar "International trends in private capital investment" which will cover the impact of PISCES, along with other key UK and global trends shaping dealmaking strategies in private capital.

1. Increased dealmaking and exit activity

After M&A activity in the second half of 2024 was relatively modest across the US, UK and Europe, dealmaking confidence returned towards the end of 2024 and that is expected to continue through 2025. The level of activity and the deal values will be sector-specific, influenced by complex and constantly changing political and economic conditions globally and regionally. This has already been illustrated in the UK by the rise in gilt yields and the larger retailers already indicating that they are expecting a challenging year ahead, in spite of a positive financial performance during the Christmas trading period.

During 2025 and against these challenging conditions, we expect to see overseas funds and corporates continuing to look for and identify attractive inward investment opportunities across the UK. These may also interlink with areas of focus within the UK’s recently announced Industrial Strategy, discussed more at 4 below.

However, within the UK, we expect mid-market deal activity to recommence after a pause in the last quarter of 2024 following a high amount of deal activity during the run-up to the UK Budget in October. We anticipate the narrowing between buyer’s and seller’s price expectations to continue and the increasing use of deferred consideration and buyer equity in deal structures to feature. Alongside the large amounts of uninvested capital, particularly in the private equity and private debt markets, we think this will likely unlock exit activity and bring forward new deals. The sectors where we anticipate enhanced deal activity are financial services and professional services (please see a link to our articles here), real estate, healthcare and media.

2. Convergence of public and private markets

The lines between public and private markets are becoming less defined, creating greater opportunities for investment outside of the public markets. This will be driven by company boards and their advisers seeking more flexible financing structures and investors looking to increase the diversity in their portfolios. Two specific areas of interest for the UK market are:

Share trading for private companies

Will regulations finally be adopted to support share trading in private company shares? This is the objective behind the establishment of a Private Intermittent Securities and Capital Exchange System (PISCES) to create greater liquidity for those who hold shares in private companies.

PISCES will be a new regulated market for private company shares allowing intermittent trading on a multilateral system. PISCES will create the framework within which operators will be able to establish their own trading venues to offer structured trading events (known as trading windows) that can be used by broad pools of investors. The UK Government’s responses to its consultation on PISCES confirms, among other things, that:

the trading venues will not facilitate capital raising through the issuance of new shares;
institutional and certain retail investors will be permitted to buy and sell shares (including High Net Worth, self-certified and sophisticated investors, in addition to employees of participating companies); and
following feedback, the regime will not include a public style market abuse regime but instead the FCA will create a more proportionate disclosure and market manipulation regime.

The first step in the establishment of PISCES is to open a five-year sandbox to test the trading environment so operators including the likes of the London Stock Exchange Group will be able to apply to join the sandbox. This follows the FCA’s consultation which outlines the proposed regulatory framework for the sandbox and the Government plans to put forward legislation by May 2025 to provide the legal framework for the sandbox.

Read our latest update on PISCES here.

Continuation of public to private exits from public markets

This is expected to continue during 2025 with the most active acquirers being either US private equity or strategic acquirers. Recent transactions announced reflect the sectors where we expect activity to be high; namely financial services (Hargreaves Lansdown’s sale and Aviva’s acquisition of Direct Line) and media (EQT’s takeover of Keywords Studio).

3. Growth in private credit

Private credit continues to expand, driven by the need for flexible financing solutions. Its perceived advantages (in particular flexibility and speed) over traditional bank lending will continue to make it attractive to debtors (not only those with private equity sponsors), while lenders prefer the more creditor-friendly covenant and security packages than those available to high yield bondholders for example. With demand coming from both sides, we expect the private credit market will grow strongly during 2025.

4. The UK’s industrial strategy and housebuilding drive: building the future

The UK’s industrial strategy (see here) launched in November 2024, presents opportunities for inbound and strategic investors into the UK. This is particularly the case for investors and operators interested in the growth-driving real estate sectors that are identified in the strategy, including:

Advanced manufacturing
Clean energy industries
Creative industries
Life sciences

The strategy focuses on places with the greatest potential for these growth sectors: city regions, high-potential clusters, and strategic industrial sites.

Alongside the industrial strategy, the Government’s housebuilding pledges and its proposed planning and leaseholder reforms will create promising opportunities for investors interested in the residential development and investment sector. The Government’s drive towards net zero and its local community focus will encourage those investors committed to placemaking, sustainability and longevity (please see links to our placemaking campaign here and recent article here).

The Government’s strategic focus will open up prospects for investors who will need to understand and have access to advice within real estate, planning, construction, environmental, infrastructure and energy.

5. Rise of secondaries and continuation funds

Secondaries and continuation funds, refinancings and net asset value lending will also continue to gain traction as investors seek liquidity and portfolio enhancement [1]. These vehicles provide a means for limited partners to release capital and for general partners to extend the life of their investments, ensuring continued value creation. These are not the traditional “exits” that private equity sponsors have used in the past to return capital to their limited partners. Therefore founders, management teams and other co-investors who rollover or reinvest equity in portfolio buyouts by private equity funds should consider how these structures impact their own participation within management incentive plans and returns profile of the share classes in which they have reinvested.

6. Continuing development and influence of AI

Generative AI tools rose to significant prominence over the last 18 months and investment in businesses that develop or leverage the power of artificial intelligence and machine learning looks set to continue at pace in 2025. For example, Microsoft has announced plans to invest around $80 billion in AI this year, focusing on the expansion of its data centre business and the deployment of cloud-based software applications. Other technology giants including Nvidia – whose stock price has famously risen by more than 20x in the last five years – are following suit with massive investments in their own products and in other AI businesses.

From a legal and compliance perspective, the EU AI Act is now in force and its different provisions will continue to take effect in phases over 2025 and into 2026. This new legislation creates a risk-based regime where the highest-risk AI systems are outright banned, and the medium and lower risk AI systems are subject to proportionate regulation concerning eg transparency (when AI is in use), explainability (why and how the AI system works) and rights of redress for those affected by machine-made decisions, etc. Much like the GDPR, the EU AI Act has an extra-territorial reach, meaning that its provisions will apply to EU-based developers and users of AI systems but also those based outside the EU (eg in the UK) where they are placing AI-generated content on the EU market. As such, businesses based in or trading with Europe and using generate AI tools will need to make an investment in their compliance efforts to ensure that they do not fall foul of the EU AI Act’s enforcement sanctions (which can be as high as EUR 35 million or 7% of a company’s annual turnover if higher).

The UK approach remains not to legislate for the time being, although the Government is under some pressure to do so, including from a private members’ bill in the House of Lords. Instead, UK businesses and investors are left to refer to a White Paper published by Rishi Sunak’s Conservative government in March 2023, which sets out “A pro-innovation approach to AI regulation” in Britain, meaning a framework of regulatory principles (eg transparency, security, and robustness of AI systems) that are enforced by existing sector regulators including the FCA and the ICO. Keir Starmer’s Labour Government has announced plans to “[introduce] binding regulation on the handful of companies developing the most powerful AI models”, but that suggests a narrower approach than the EU AI Act has taken, focusing on the “big techs” like Google, Microsoft and OpenAI rather than all kinds of AI developers and users.

UK companies will need to implement their AI strategies and their policies for lawful use of such technologies; and those businesses in the creative industries (or those with content that could be scraped and used by AI developers to train their AI models) should keep watch on the progress of cases in the UK and US courts in the high-profile copyright claims brought by the New York Times (versus OpenAI), Getty Images (versus Stability AI) and others. Content owners may even have an opportunity to agree a content licensing deal with a large AI developer, a trend that grew in prominence in 2023 and 2024 and will continue in 2025.

7. Emphasis on ESG and sustainable investing

2024 was in some respects the year of the “anti-ESG” backlash. This was particularly evident in the US, where engagement with environmental, social and governance (ESG) principles has generally been behind that of European fund managers, and the focus has remained predominantly on shareholder returns rather than stakeholder capitalism. The incoming Chair of the SEC, selected by the President-elect, has publicly opposed climate-related disclosure rules in the past, and we expect there will be no shortage of regulatory developments to monitor in the US in the coming months as the new administration enters office.

In the EU, 2025 had been expected to be the year of implementation of new, landmark sustainability legislation. But a surprise announcement by European Commission President Ursula von der Leyen of an “omnibus proposal” to amend the Corporate Sustainability Due Diligence Directive (CSDDD), the Corporate Sustainability Reporting Directive (CSRD) and the EU Taxonomy Regulation has sparked concerns among many ESG-focused investors and institutions that reopening the regulations will cause more uncertainty in the immediate future, and ultimately lead to weakened standards of sustainability reporting and disclosures.

Closer to home, an updated version of the FCA’s UK Stewardship Code – applicable to asset managers and sovereign wealth funds, among others – is currently under public consultation. The proposed changes include an amended definition of “stewardship” to support more transparent conversations between entities in the investment chain about their investment beliefs and objectives, and amendments to aid higher quality disclosures in investor reporting.

8. Greater regulation or deregulation?

At a global level, commentary has focused on Donald Trump’s re-entry to the White House and his deregulation agenda, evidenced by appointments into key roles within his government, particularly to the Department of Commerce and the Federal Trade Commission. At the same time there is the potential for much greater regulation between international trading partners through the adoption of trade tariffs and other market barriers. These factors will impact different industries in different ways, but the private equity, financial, banking and energy industries will be looking for this shift in relations to create opportunities for deals in their markets.

At a UK domestic level, additional regulation is expected in 2025. In particular:

The changes to the UK’s Corporate Governance Code for UK public companies came into effect for financial years beginning on or after 1 January 2025: UK Corporate Governance Code 2024.
The failure to prevent fraud offence under the UK’s Economic Crime and Corporate Transparency Act 2023 (ECCTA) will come into force on 1 September 2025. This will apply to large companies who meet two out of the three thresholds of having more than (1) 250 employees, (2) £36 million of turnover and (3) £18 million in assets: Navigating the failure to prevent fraud offence: guidance for organisations.
It is expected that Autumn 2025 will see the identity verification regime (introduced by ECCTA) come into effect for new directors and new PSCs (people exercising significant control) of UK registered companies, with a 12-month transition period for verification of existing directors and PSCs. This will be a significant change for the oversight and administration of UK companies: Where are we now with Company Law reforms under the Economic Crime and Corporate Transparency Act 2023 (ECCTA)?.
The Employment Rights Bill will continue to make its way through Parliament, with most changes expected to come into effect no earlier than late 2025/2026: New Employment Rights Bill – Labour’s plans for employment law.
For investors and acquirers, assessing the applicability of the UK National Security and Investment Act on corporate transactions will need to continue: National security and investment act: recent developments.

9. The influence of direct and indirect taxation

As we reported following the UK Government’s first Budget, see here, tax changes will have an impact on deal timing and pricing. For direct taxes, the increase in capital gains tax (CGT) rates from 20% to 24% was not as high as first feared. We therefore expect those transactions that went on hold before the UK Budget will come back in the first half of 2025. The counterpoint to this will be assessing the impact of the increase to employer’s national insurance coming into effect in April 2025 and the changes to business rates and the impact of these on companies’ future earnings when assessing company valuations. These tax and rate changes will be sector-dependent, with people- and property-intensive businesses, such as those within the leisure and hospitality industries, being impacted more than businesses with more flexibility in their business models and workforce.

This article was produced by our private capital group, representing our private capital specialists from across the firm including Richard Lane, Charlie Court, Sophie Giblin, Simon Graham, Christina Tennant, Kya Fear, Alan Baker, India Benjamin and David Gubbay.

During the course of this year we will be providing regular insights for investors, founders, business owners and decision makers within private capital. If you would like to join these events or would like to share these insights with others, please get in touch with Oliver Watkins.

[1] Fair Winds - Why private markets are positioned for growth

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

International trends in private capital investment

Join our free webinar on Monday 12 May, which will cover what successful M&A and business exits look like in 2025, and how key UK and global trends are shaping dealmaking strategies in a rapidly evolving market.