McKinsey’s latest private equity report characterizes the asset class as at an inflection point. While headline fundraising fell 24 percent last year, the firm sees liquidity, market environment, and limited-partner sentiment all swinging back in favor of sponsors through the rest of 2025.
Despite the drop in fund commitments, a McKinsey survey found that “30 percent of respondents said they plan to increase their private equity allocations in the next 12 months.”
Some areas are already emerging as bright spots. Middle market strategies (defined as fund sizes of $1-5 billion) held flat year-on-year, while fresh capital from separately managed accounts, co-investments and continuation vehicles offset traditional fundraising shortfalls with what McKinsey labeled “a multitrillion-dollar boost” to reported assets under management.
One of the report’s more notable takeaways is the cash flow dynamics for private capital investors. Distributions finally ticked up in 2024, and, coupled with the lackluster fundraising, pushed cash flows net positive for LPs. “For the first time since 2015, sponsors’ distributions to LPs exceeded capital contributions (and were the third highest on record).”
Large transactions helped drive the rebound as deals above $500 million rose 37 percent by value and 3 percent by count.
New investments also saw some momentum. Median entry multiples recovered from a cooler 2023 to hit 11.9x LTM EBITDA, the second-highest level on record.
Public-to-private transactions gained popularity, accounting for 11 percent of global deal value in 2024, up from 9 percent the prior year. Within Europe, take-privates jumped nearly 65 percent from 2024.
McKinsey attributes the shift to sponsors choosing “undervalued companies” over secondary buyouts and flagging the growing presence of U.S. capital in European markets (echoing commentary earlier this month from KKR’s Henry Kravis on his view of the current opportunity set).
Looking at value creation, StepStone data cited in the report show leverage and multiple expansion accounted for 61 percent of buyout returns between 2010-2022. With those levers now fatigued, firms are turning to portfolio operations groups to fill the gap; McKinsey found the average team size of such functions has “more than doubled in the past three years.”
Looking forward, the report lists the year’s remaining potential catalysts: three U.S. rate-cut decisions penciled between June and December; EU elections that could reshape tariff policy; and year-end fundraising closes that will test whether 2024’s uptick in optimism can translate into hard commitments.