USA – CALIFORNIA Trends and Developments Contributed by: Vijay Sekhon, Mehdi Khodadad, Nicolai Schwarz-Gondek and Payom Pirahesh, Sidley Austin LLP
Increased cost of debt financing In 2024 and to date in 2025, debt financing costs have modestly declined but remain high compared to recent norms due to monetary policy and economic condi - tions. Higher interest rates and tighter lending stand - ards have increased the expense of leverage for PE sponsors, reducing PE M&A deal volume and causing valuation mismatches with sellers. This impacts PE deal structuring, as PE sponsors must balance the need for leverage with higher capital costs. Elevated debt costs affect investment returns and require PE sponsors to consider alternative financing or seek higher-growth opportunities. Many PE sponsors are focusing on direct lending to companies, including other PE portfolio companies, to capitalise on higher interest rates where traditional banks cannot lend. Increased competition The PE market continues to witness a surge in com - petition, driven by abundant capital and a robust fundraising environment. This competition has led to more aggressive deal-making by PE sponsors that are constantly fundraising, deploying capital and seeking investment exits. PE sponsors must navigate these dynamics, balancing the need for attractive returns with the risks of overpaying for assets. The influx of new market entrants, including family offices and sov - ereign wealth funds, has intensified the competitive landscape. While potential lower interest rates, narrow credit spreads, greater leverage capacity and a busi - ness-friendly current administration signal a potential increase in M&A activity, PE sponsors will continu - ously need to differentiate themselves to attract inves - tors and obtain outsized returns. Many PE sponsors are increasingly focusing on value creation strategies post-acquisition, such as operational improvements and strategic add-ons, to enhance the performance of their portfolio com - panies. Other PE sponsors have shifted to adding value by providing specialised knowledge, quicker deal execution and active operational support. These advantages, however, demand investments in talent and infrastructure that not all PE sponsors can easily manage. PE sponsors are also focusing on late-stage growth equity and structured preferred investments as an asset class to broaden their investment scope and seek attractive valuations and returns.
Secondary market growth The secondary market for PE interests continues to grow substantially. This trend is driven by the need for liquidity, portfolio reallocation and rebalancing. To achieve this, investors work with firms specialising in secondary market PE transactions. Additionally, there is a growing trend towards the use of continua - tion funds, which allows PE sponsors to extend their investment horizons and provide liquidity to existing investors. The legal landscape for secondary transac - tions is evolving, with a focus on disclosure, valuation and transfer restrictions. PE sponsors must navigate these complexities to ensure smooth, compliant trans - actions. Secondary market transactions offer flexibility for limited partners (LPs) seeking to exit investments before the end of the fund’s life cycle amid slower dis - tributions and portfolio allocation adjustments. These transactions require careful management of investor relations and adherence to fund agreements and regu - lations. Continuation vehicles In parallel, continuation vehicles (CVs), often struc - tured within the secondaries market, have gained momentum as an increasingly important tool for PE sponsors. Lack of traditional exit opportunities, even for high-performing portfolio companies, has led PE sponsors to turn to CVs to extend hold periods and crystallise returns for existing investors. The use of CVs is expected to continue expanding as the M&A market remains uneven and distributions slow. Special Purpose Acquisition Companies (SPACs) Following the 2020–21 popularity, SPACs underwent a decline as a force in the PE market. These blank- check companies provide an alternative route to pub - lic markets, offering flexibility and speed. The SEC increased scrutiny of SPACs, focusing on disclosure practices, conflicts of interest and due diligence, which decreased the volume of SPACs as well as PE sponsors’ interest in SPAC transactions as a portfo - lio company exit strategy. As of 2025, SPACs attract renewed attention, driven by specialised PE sponsors. While their popularity has not reached the heights during the 2020–21 SPAC boom, 2025 has seen a significant increase in SPAC IPO filings on US stock exchanges compared to 2023–24. The resurgence is due to more discipline than during the 2020–21 SPAC
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