Outlook Private Equity
Disclaimer: The information and materials prepared are for internal use only and on how the Dancap Family Investment Office (“Dancap”) views current market dynamics. Dancap does not guarantee the accuracy or completeness of the material and it is not intended in any manner to be investment, financial, legal, accounting, tax or other advice and should not be relied upon.
Dancap's Current Private Equity Strategy
February, 2025
Dancap has over 30 years of track record investing in private equity through third party funds, co-investments, and direct investments. Our private equity portfolio is diversified across several underlying strategies and geographies, but our key focus is US buyout, secondaries and to a smaller extent, growth equity funds . This market overview provides an update on current market dynamics, outlook, and future risks within as they relate to Dancap’s current private equity holdings.
Buyout
Strategy
After a decade of favorable financial conditions shaped by near-zero interest rates and low, steady inflation, buyout firms are now navigating an economic environment defined by elevated interest rates and inflation. Higher borrowing costs have tightened cash flows, making it essential for firms to be more agile in managing their investments and operations. This shift has compelled general partners (GPs) to move away from traditional return strategies such as financial leverage and multiple expansion and instead, prioritize sustainable value creation through organic revenue growth and margin improvement. To achieve these objectives, GPs are increasingly leaning on value creation teams that work directly with portfolio companies. These teams focus on establishing scalable and efficient business processes and systems. Their efforts are directed toward critical operational areas, including advancing product and technology innovation, optimizing go-to-market strategies, attracting top talent, and automating back-office functions. By addressing these areas, managers who can effectively add value and enhance the operational performance of their portfolio companies should be best positioned to deliver strong returns in the years ahead.
Source: Morgan Stanley 2025 GIMA Alternative Investments Themes
According to Blackrock, private equity valuations remain below those of public markets, creating a compelling opportunity for investors. While public markets have adjusted rapidly, private equity valuations have been slower to respond. A more accommodative interest rate environment is likely to further boost private equity valuations, as improved access to credit and lower borrowing costs encourage dollmaking. Compared to 2023, financing conditions have improved with the revival of the syndicated loan market and greater capital flows from private debt funds. This improved financial landscape is expected to support continued growth in private equity activity and valuations.
Sources: Blackrock 2025 Private Markets Outlook
Buyout Outlook
Buyout markets are expected to improve in 2025, driven by more accommodative monetary policy and a Trump administration supportive of increased M&A activity. These factors are anticipated to boost both entry and exit activity. According to BlackRock, deal activity in 2024 has risen by 21% compared to 2023, surpassing the pre-pandemic average by 45%. High-quality deals remain the most sought after, continuing to attract strong competition. A more active exit market, combined with an increased focus from general partners (GPs) on returning capital, is providing relief to investors seeking distributions. In 2024, capital calls outweighed distributions for the first time since 2015, creating pressure on limited partners (LPs) to hold back from making new commitments. Global private equity funds aiming for less than $100m in commitments raised only $1.8bn between them in the first six months of this year, compared with $7.7bn in the whole of 2023. Private equity firms are now holding a record 28,000 unsold companies valued at over $3 trillion, according to Bain & Co. To address the challenges of a slower exit environment in recent years, GPs have increasingly relied on alternative liquidity structures, such as NAV facilities and continuation vehicles, to meet their liquidity objectives, which bodes well for secondary managers as discussed below.
Sources: (left) Financial Times: “Buyout executives say distributions are ‘magic word’ after exit slowdown” ; (right) Blackrock 2025 Private Markets Outlook
Secondaries
Strategy
The secondary market continues to expand, driven by an increase in GP-led transactions as a preferred exit tool and LPs actively managing their liquidity exposures. As secondary transactions become more mainstream, they are playing an increasingly vital role in private markets. As highlighted in our Buyout Outlook section, liquidity remains a critical concern for LPs seeking to balance portfolio exposure while ensuring funding for future commitments. Concurrently, GPs are turning to secondary market solutions, such as continuation vehicles, to retain high-value assets and fulfill distribution obligations.
Secondary funds continue to offer an attractive risk-return profile. By mitigating the J-curve effect and providing access to diversified pools of assets, these funds have proven their value in a rapidly changing market environment. Favorable pricing opportunities, including discounts on assets driven by liquidity pressures, further enhance the appeal of secondary investments. Investors seeking to capitalize on the opportunities within this space may want to focus on managers with strong expertise in both traditional LP-led and innovative GP-led transactions.
Source: Morgan Stanley 2025 GIMA Alternative Investments Themes
Secondaries Outlook
The secondary market hit record transaction volumes in 2024, reaching $162 billion – a 45% increase compared to the previous year, according to Jefferies. GP-led deals hit $75 billions with continuation vehicles representing 90% of total GP-led volume. LP-led transactions also reached new highs in 2024, with $87 billion in sold in 2024, a 36% increase from the previous record set in 2021. The increase in sales activity reflects LPs’ efforts to rebalance portfolios after sustained low levels of cash distributions. Average pricing for LP transactions improved significantly, with discounts narrowing to 6% below NAV for buyout funds, compared to 9% in the prior year. The secondaries market remains robust and strong demand for diversified exposure and favorable pricing conditions in private credit, real estate, and venture capital further enhance the market’s growth potential. Managers skilled in executing both LP- and GP-led strategies are well-positioned to thrive in this evolving landscape.
Source: Jeffries Global Secondary Market Review; January 2025
Growth Equity
Strategy
According to Wellington Management, in 2024 capital deployment into growth equity increased by 20% compared to 2023. More importantly, the quality of deals also improved, with stronger companies returning to market to raise capital. This shift appears to be driven by many factors including stronger performance and increasing confidence from investors. This recovery is taking place against a backdrop of reasonable valuations, with most deals pricing at historical averages with artificial intelligence (AI) being an exception. Looking ahead to 2025, the combination of stable valuations and gradual increases in deployment is expected to continue. A robust exit market could add further momentum, driving deployment and valuations closer to historical prices.
Source: Wellington Management 2025 Venture Capital Outlook
Growth Equity Outlook
The IPO and M&A markets have remained frozen since 2022, significantly slowing exits in the growth equity sector. Companies have struggled to go public or secure acquisitions, while growth equity managers face challenges deploying capital amidst uncertainty around interest rates, inflation, and recession risks. Many investors remain cautious, delaying commitments to new deals until greater clarity emerges. That said, 2025 could mark a turning point. According to Wellington Management, historically IPO activity tends to rebound three years after a downturn and performs better in post-election years. In 2024, IPO proceeds increased 37% year-over-year, and post-IPO performance outpaced the S&P by nearly 10%, signaling improving conditions. Additionally, potential regulatory easing under the new administration could unlock liquidity in M&A markets. For now, growth equity managers will likely need to continue focusing on managing existing portfolios and optimizing investments. While higher interest rates pose challenges, growth equity’s limited reliance on leverage may provide resilience until the market begins to recover.
Dancap continues to look to invest with managers who have demonstrated strong positive returns and consistent performance in their specific areas of expertise across market cycles.
To see the Dancap Private Equity Investment Criteria and Portfolio, please click here.