After years of sluggish returns, fewer deals and a buildup of dry powder, 2025 appeared to indicate that the private equity industry is defrosting. Dealmaking is on the rise, and the market for initial public offerings is reemerging, according to research from consultant McKinsey & Co. Yet the industry still faces significant structural headwinds.
“This is not your grandfather’s private equity industry; this is a very changed industry after decades of growth, and [it] is way more challenging now than it was,” says Alex Edlich, a senior partner in McKinsey’s private capital practice. “That has huge implications on deployment, on exit, on value creation, on fundraising and on [general partner] strategy.”
The industry is reeling from the third consecutive year of underperforming public markets and a continuing decline in distributions to limited partners.
“Those are still quite challenging statistics, and then you add on the impact of geopolitical instability—and [artificial intelligence]—and we’ve got a lot of chefs needing to rethink how they’re making their meals,” Edlich says.
McKinsey’s report emphasized the need for continued evolution.
“The year 2025 may have marked a sunnier environment for the private equity industry after several challenging years, but the visibly technical terrain ahead has a stark implication: This maturing industry will need to continue to adapt,” the report stated.
Dealmaking Trends
In 2025, deal value rose 19% year-over-year to $2.6 trillion, driven largely by the completion of larger deals. Still, the number of deals fell 9%. Deals larger than $2.5 billion in value increased by 72%, while deals greater than $500 million rose more than 51%.
McKinsey noted that the rebound in deal value is a result of acquirers buying companies at higher multiples. Buyout valuation multiples are the highest they have been since 2022, at 11.8 Enterprise Value/EBITDA, due to larger deals occurring more frequently and larger deals trading at higher multiples.
Deployment pressures have limited partners flying to quality assets, while GPs are paying premium multiples for durability and downside protection, according to the McKinsey report.
The report also noted that dry powder available to GPs is aging, with 40% having been available for the past two years. Still, buyout sizes are rising without a corresponding increase in leverage, as GPs are contributing more equity to their deals. This means GPs can rely less on leverage to produce outsized returns, according to McKinsey.
Exit Activity and LP Expectations
Despite numerous headwinds affecting the industry, LP deployment into private equity strategies remained stable, with 70% of 300 LPs surveyed by McKinsey indicating that they plan to maintain or increase their private equity deployment this year.
“LPs know that the road ahead will be uneven. But rather than making a U-turn, they are choosing to stay the course and are shifting gears to navigate a more demanding terrain,” McKinsey’s report stated. “Conviction in private equity remains intact; what is changing is how LPs allocate, evaluate and engage as the industry trends toward greater maturity.”
The value of exits increased in 2025 by approximately 41% year-over-year to $1.3 trillion, the second-highest year on record behind 2021’s total exit value of $1.72 trillion. Still, the total count of all exits last year declined by 15%.
As a result, LPs and GPs are both turning to liquidity solutions like the secondaries market and continuation vehicles.
“In the surveys we’ve done with LPs, the historic stigma of continuation vehicles is not there as much,” Edlich says.
The value of these liquidity solutions have increased to $115 billion in 2025 from $35 billion in 2020, with McKinsey estimating that 14% of all sponsor-backed exits go through continuation vehicles. In five years, McKinsey estimated this figure will reach 29%.
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Tags: McKinsey & Co., Private Equity