USA – NEW YORK Trends and Developments Contributed by: Karessa Cain, Gregory Pessin, Mark Veblen, Victor Goldfeld, George Tepe and Courtney Hauck, Wachtell, Lipton, Rosen & Katz
Capital constraints drive creative financing and deals of scale In the second half of 2024, we saw an increase in lev - eraged buyouts as private equity firms acted quickly on interest rate cuts and cheaper financing. Although market participants predicted that early 2025 would bring a boom in private equity M&A, starting in March, the impact of tariffs, inflation and persistently high interest rates created a challenging environment for M&A financing, with leveraged buyout deals dropping 16% in the first half of 2025, according to data from Dealogic. This environment of high interest rates and costs has created pressure on the capital require - ments of private equity firms, which have increasingly turned to large-scale, multiparty deals for additional capital. At the same time, private equity firms are obtaining new financing and leveraging existing financing in new and creative ways. First, continuing the trend from recent years, pri - vate credit lending has continued to thrive, growing to nearly USD2 trillion assets under management in 2024. Private credit has expanded beyond direct com - mercial lending to a number of areas, including asset- backed financing, real estate debt and other types of financing, and there have been recent high-profile partnerships between private credit lenders and tradi - tional banks. Private credit is a particularly synergistic fit for private equity M&A, including because these lenders provide borrowers certainty in terms (ie, com - mitments without market “flex”), offer PIK or PIK-like options (including in the form of delayed draw term loan facilities meant to finance future interest expense) for borrowers seeking to manage their liquidity runway after consummating an acquisition and have demon - strated openness to providing credit in circumstanc - es under which regular banks may not be willing to lend. Particularly in an environment of regulatory and political volatility, private lenders are growing in promi - nence as a flexible, bespoke financing alternative to traditional lending models. Second, “net asset value” or “NAV” loans have emerged as a popular form of lending to investment funds and asset managers. In these deals, cash flows and the value of the fund’s underlying assets serve
and/or general partners with strong track records of delivering multiplying returns on assets. While the newest innovations such as CV-squared remain niche, as exit pressure continues to grow, age - ing private equity funds must weigh the risks they are willing to take for new paths to liquidity. In many situ - ations, sponsors may benefit from maintaining option - ality and pursuing a multi-track exit path towards an IPO, sale, dividend recapitalisation or other monetisa - tion strategies. Funds and Fundraising Fundraising faces headwinds… while dry powder accumulates Private equity sponsors have faced a relatively lean fundraising environment since the highs of early 2022, as many institutional investors have slowed their investment pace and shifted their focus towards other asset classes. The environment remains chal - lenging both in the United States and globally, influ - enced by broad market uncertainty resulting from the Trump administration’s “Liberation Day” in early April, no rate cuts from the Federal Reserve, and further delays in the re-emergence of exit opportunities that could have spurred fundraising throughout 2025. Fun - draising volumes in the first half of 2025 annualise to approximately USD446 billion, the lowest annual fundraising total since 2018. 2025 is on track to be the third consecutive year of fundraising declines, assum - ing no pickup in the second half. In this context, the outlook for the secondary market is optimistic, as sponsors continue to turn to this path for relief from exit pressure, with more than USD100 billion of sales taking place in the first half of 2025 – an increase of almost 50% from the same period in 2024, according to Financial Times. Although a recent Bain report suggests that secondaries still amount to less than 5% of private equity assets under manage - ment globally as of early June 2025, recent fundraising momentum (including several instances of second - ary groups raising amounts of USD20–30 billion) sug - gests the role of secondaries in the fundraising market is crystallising as this multi-year trend continues to rise in popularity. In 2024, secondary market deals reached a record USD155 billion, which was 15% higher than the prior 2021 record of USD135 billion.
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