Schroders Outlook | Small-cap PE deals surge as rates ease

What's new: Private equity markets show strong signs of recovery heading into 2025, with small and mid-cap deals leading the rebound as interest rates begin to fall and liquidity returns.

Why it matters: The shift marks a potential turning point for private markets after a challenging 2024, with new opportunities emerging in both traditional buyouts and continuation vehicles.

The big picture: While 2024 saw subdued dealmaking and wide bid-ask spreads, market conditions are improving. Falling rates and easing cost pressures should boost multiples and improve cashflows across the private equity landscape.

By the numbers:

• Large-cap fundraising grew 10.7x while deal flow only grew 3.6x from 2010-2022

• Small/mid-cap buyouts delivered +6% returns vs -32% for Nasdaq in 2022

• 40x more small and mid-funds exist compared to large funds

• First half of 2024 saw record secondary deal volume, with 43% being GP-led deals

Key trends to watch:

1. Small-cap advantage

   1. Valuations show significant discount compared to large-cap deals

   2. Better positioned to generate meaningful return multiples

   3. More resilient during market volatility periods

2. Improving exit environment

   1. Large amount of dry powder seeking deals

   2. Sponsor-to-sponsor exits showing uptick

   3. Continuation vehicles gaining prominence

3. Shifting market dynamics

   1. Borrowing costs expected to decrease

   2. Bid-ask spreads beginning to normalize

   3. Capital deployment pace accelerating

The bottom line for investors: Small and mid-market private equity offers compelling opportunities in 2025, with lower entry prices and multiple paths to exit. Continuation vehicles provide an additional tool for maintaining quality assets while market conditions normalize.