In January, private equity professionals acted like they were let out to play.
After all, 2024 was marked by investors begging for liquidity and PE managers hoping for a much-needed pickup in M&A and IPOs. After the election of Donald Trump in November and his promised growth and deregulatory agenda, Wall Street and investors expected a boom in dealmaking in 2025.
We all know the predicted surge has yet to arrive. I believe that firms now need to figure out options to offload their dry powder and get ahead of a potential pullback as investors run out of patience. If not, the exodus could be dramatic.
Frankly, we’re already in a precipitous situation. Last year, private equity assets under management dipped for the first time in decades, suffering a 2 percent decrease compared to 2023. Investors have scaled back their commitments to new funds, primarily because managers have cut distributions as they continue to hold tight to their companies. If we continue to keep our dry powder dry, this reluctance to exit could create widespread disillusionment among investors.
We need to avoid this at all costs and get on with investing.
Let’s look at the facts. Currently, private equity firms are sitting on an estimated $500 billion in dry powder. And the clock is ticking on their investment periods.
Of course, the argument against investing now is compelling. The uncertain monetary and macroeconomic environment has made borrowing a lot less attractive and made it difficult to accurately forecast business growth and consumer appetite.
Still, there is no shortage of healthy, high-growth businesses in the U.S. – and ones that I know first-hand could generate outsized returns with the right owner, showcasing the real power of private equity. But many investors don’t know where to find them.
Instead, private equity firms have been primarily focused on manufacturing, software, and technology — all advanced and complex industries with strong market appeal. Many of these are undoubtedly great, high-growth, and extremely profitable sectors, however, they’re crowded. Too many PE firms are sniffing around the same companies, making the competition fierce.
Firms need to look elsewhere.
They need to find true ‘diamonds in the rough’ (a little like those early days of PE) that define, run, and dictate the day-to-day critical operations of cities, towns, and neighborhoods across America — and at the same time have high-growth potential.
Sectors like commercial and residential services, real estate, and oil and gas are a prime target for private equity. There are industries vital to so many people’s lives and ripe and ready to be disrupted. With the right backing and expertise, businesses in these sectors can generate enviable ROIs — and demonstrate enough potential to claw back investors considering a retreat from PE.
Businesses like these tend not to have yet been modernized, and they usually rely on manual labor. Proper operational oversight, management, and technology-driven approaches can dramatically transform them, meaning PE firms could feasibly take businesses like these to the top of their respective industries. In doing so, they could not only make a tangible impact on their investors’ ROI but also on the sectors themselves and the customers that rely on them.
I’ll dial it back.
Our industry cannot afford to wait any longer. Regardless of the size of the PE manager, LPs will soon get itchy if we don’t demonstrate immediate dealmaking ability. If the pullback continues, we could see another year of low commitments to new funds.
Private equity — at its best — provides businesses with a path to achieve their potential. As a sector, we collectively provide these companies with the management skills and resources needed to reach new heights. But if we continue to put off our dealmaking and keep our dry powder in storage, that core message could be quickly forgotten.
The solution? Turn to new, previously neglected industries. The glamour and hype of industries like tech, manufacturing, software, and even financial services, will only get PE so far. If you’re a bigger firm with deep pockets and unlimited resources, then maybe those companies will be worthwhile moves. Outside of this small group, however, your chances of attractive ROIs and IRRs are fairly limited, in my opinion.
With so many businesses across the U.S. crying out for capital, there’s no reason PE firms should be sitting on their hands. We need to collectively prove to our LPs that our strategies and returns are worth the fees and outperform the public markets.
If not, the story writes itself — and we’ll watch as investors retreat.
Kade Thomas is the founder and CEO of Emory Oak Partners, a private equity firm specializing in the home and commercial services industries, as well as niche real estate strategies.
Opinion pieces represent the views of their authors and do not necessarily reflect the views of Institutional Investor.
